The Impact of Cash Flow Management Versus Accruals Management on Credit Rating Performance and Usage

Review of Quantitative Finance and Accounting, Forthcoming

37 Pages Posted: 24 May 2019 Last revised: 13 Jul 2022

See all articles by Eliza Xia Zhang

Eliza Xia Zhang

University of Washington Tacoma; University of Washington, Tacoma

Date Written: April 17, 2019


Corporate bond issuers attempt to influence bond ratings through their discretion over reported numbers, which could diminish credit rating quality. I find that cash flow management is negatively associated with rating quality, while accruals management is not. These results suggest that rating agencies fail to adjust for cash flow management, but they undo accruals management. The differential results for cash flow management versus accruals management could be due to the rating agencies’ more skeptical attitude towards accruals and the lower cost of adjusting accruals management. The relation between cash flow management and rating quality is weaker for issuers with high leverage and issuers with prior ratings around the investment-/speculative-grade cutoff. Overall, the evidence suggests that rating management through managerial discretion over reported numbers has a detrimental impact on rating quality, but only via the cash flow component. Fortunately, the bond market understands the implications of cash flow management on rating quality and relies less on ratings in response to cash flow management.

Keywords: Cash flow management; Accruals management; Corporate bond rating quality; Credit rating agencies; Bond yield spread

JEL Classification: M41; G24; G18

Suggested Citation

Zhang, Eliza Xia and Zhang, Eliza Xia, The Impact of Cash Flow Management Versus Accruals Management on Credit Rating Performance and Usage (April 17, 2019). Review of Quantitative Finance and Accounting, Forthcoming, Available at SSRN:

Eliza Xia Zhang (Contact Author)

University of Washington, Tacoma

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Tacoma, WA 98402-3100
United States

University of Washington Tacoma ( email )

310 Dougan
Tacoma, WA WASHINGTON 98402
United States
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