Do Managers Respond to the Divergence between Debtholders and Shareholders? Evidence from Equity Analyst-Based Benchmark Beating

47 Pages Posted: 29 Dec 2022

See all articles by Joshua G. Coyne

Joshua G. Coyne

University of Central Arkansas

Kevin H. Kim

Korea Advanced Institute of Science and Technology (KAIST)

Sangwan Kim

University of Massachusetts Boston

Abstract

We examine managers’ responses to the divergent emphases of debtholders and shareholders as evidenced in analyst-based benchmark beating behavior. Using both levels and changes in the composition of debt and equity, we find that firms with high debt-to-equity intensity are less likely to meet or beat analyst-based earnings benchmarks. We also find that managers of high debt-to-equity firms that achieve analyst earnings targets are less likely to use accruals earnings management. In additional tests, we report that equity investors are less sensitive to earnings surprises of firms with high-debt reliance than those with low-debt reliance. In supplemental tests using debt covenant violations as a shock to right transfer between shareholders and creditors, we find additional support for the significant role of capital mix in equity benchmark beating. Overall, our evidence suggests that debt vs. equity intensity in capital structure is an important factor shaping firms’ analyst benchmark beating incentives.

Keywords: Capital structure, Analyst forecasts, Benchmark beating, Earnings Management

Suggested Citation

Coyne, Joshua G. and Kim, Kevin and Kim, Sangwan, Do Managers Respond to the Divergence between Debtholders and Shareholders? Evidence from Equity Analyst-Based Benchmark Beating. Available at SSRN: https://ssrn.com/abstract=4314855 or http://dx.doi.org/10.2139/ssrn.4314855

Joshua G. Coyne

University of Central Arkansas ( email )

201 Donaghey Ave.
Conway, AK 72035
United States

Kevin Kim

Korea Advanced Institute of Science and Technology (KAIST) ( email )

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

Sangwan Kim (Contact Author)

University of Massachusetts Boston ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

HOME PAGE: http://www.umb.edu/faculty_staff/bio/sangwan_kim

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