Do Firms Manage Their Credit Ratings? Evidence From Rating-Based Contracts
Accounting Horizons, Forthcoming
45 Pages Posted: 20 May 2019 Last revised: 13 Jul 2022
Date Written: May 21, 2018
This paper examines whether firms with rating-based performance-priced loan contracts (PPrating firms) manage cash flow from operations (CFO) and accruals to obtain better firm credit ratings. I find that for PPrating firms, both CFO management and accruals management are positively associated with firm credit ratings. In the cross-section, the relation of CFO management and accruals management with firm ratings is less pronounced when there is a larger benefit associated with inflated firm ratings. These results support the view that financial statement manipulation helps PPrating firms achieve more favorable ratings; when these firms are subject to more stringent rating-agency monitoring, such manipulation proves less effective.
Keywords: rating-based debt contracting; cash flow management; accruals management; firm credit ratings
JEL Classification: G18, G20, G28
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