The Information Quality Effect of Accruals-Based Benchmark Beating: Evidence from the CDS Market

50 Pages Posted: 28 Jul 2016 Last revised: 16 Apr 2018

See all articles by Aytekin Ertan

Aytekin Ertan

London Business School

Stephen A. Karolyi

Carnegie Mellon University - David A. Tepper School of Business

Kalin S. Kolev

City University of New York - Stan Ross Department of Accountancy

Date Written: April 4, 2018

Abstract

How does reaching financial reporting targets through earnings management interact with information quality? We address this question through flatness, a theoretically motivated measure of information quality based on the ratio of short-term to long term credit default swap spreads. We find that flatness increases when firms narrowly beat the analysts’ consensus earnings forecast through accruals management, indicative of information quality deterioration, but also that flatness is not sensitive to cash-flow-based real activities manipulation. Further, the main effect of accruals-based benchmark beating on flatness does not obtain for equity returns or for the level of CDS spreads, ruling out explanations related to valuation. Together, our findings imply that debt markets react to earnings management through an information quality channel and that accruals-based manipulation for benchmark beating diminishes the informativeness of the earnings signal for financial statement users.

Keywords: reporting benchmarks, accruals, information quality, credit default swaps

JEL Classification: D80, G10, M41

Suggested Citation

Ertan, Aytekin and Karolyi, Stephen A. and Kolev, Kalin S., The Information Quality Effect of Accruals-Based Benchmark Beating: Evidence from the CDS Market (April 4, 2018). Available at SSRN: https://ssrn.com/abstract=2815022 or http://dx.doi.org/10.2139/ssrn.2815022

Aytekin Ertan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
442070008131 (Phone)

Stephen A. Karolyi

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
4122682909 (Phone)

Kalin S. Kolev (Contact Author)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

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