Asymmetry in Earnings Management Surrounding Targeted Ratings

62 Pages Posted: 18 May 2021

See all articles by Evan Eastman

Evan Eastman

Florida State University

David L. Eckles

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Martin Halek

University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance

Date Written: May 15, 2021

Abstract

This study examines earnings management among financial institutions attempting to achieve a target financial strength rating. We find empirical evidence that firms with an actual rating below their target rating use income-increasing earnings management, however we find no evidence that firms above their target rating manage earnings. Our result is consistent with financial institutions facing less pressure from unions and suppliers, but more pressure from regulators, relative to non-financial institutions. Our findings are robust to a variety of alternative definitions of target rating. Notably, we examine a subset of firms with an exogenously determined target rating and find consistent results. We also find evidence that firms can influence ratings agencies, as firms that underestimate their initial claims are more likely to receive a rating upgrade.

Keywords: Accounting Discretion, Ratings Agencies, Accruals, Earnings Management, Insurance, Reserve Management

JEL Classification: G22, G24, M41

Suggested Citation

Eastman, Evan and Eckles, David L. and Halek, Martin, Asymmetry in Earnings Management Surrounding Targeted Ratings (May 15, 2021). Available at SSRN: https://ssrn.com/abstract=3846968 or http://dx.doi.org/10.2139/ssrn.3846968

Evan Eastman (Contact Author)

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

David L. Eckles

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States

Martin Halek

University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance ( email )

Madison, WI
United States

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