Bond Ratings Downgrades and Managers' Accounting Choices

Posted: 12 Jun 1995

See all articles by Dimitri Ghicas

Dimitri Ghicas

Athens University of Economics and Business; CUNY - The Graduate Center

Joseph Kerstein

Yeshiva University - Syms School of Business

Kyoo-Hwan Lee

Zicklin School of Business, Baruch College - The City University of New York

Steven B. Lilien

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

Abstract

This paper studies accruals operating cash flow and writedowns in 73 firms whose bond ratings were downgraded by Moody's or S&P for reasons relating to declining earnings prospects. We find that managers' accounting choices primarily reflect their firms' financial difficulties rather than attempts to inflate income. In the year of the bond rating downgrade firms show significantly more negative accruals but higher average operating cash flows than a comparable set of firms acting as the control sample. Our findings provide support that accruals and writedowns of financially troubled firms improve earnings' ability to measure firm performance.

JEL Classification: M40, G30

Suggested Citation

Ghicas, Dimitri and Kerstein, Joseph J. and Lee, Kyoo-Hwan and Lilien, Steven B., Bond Ratings Downgrades and Managers' Accounting Choices. Available at SSRN: https://ssrn.com/abstract=55493

Dimitri Ghicas

Athens University of Economics and Business

76 Patission Street
Athens, 104 34
Greece

CUNY - The Graduate Center

535 E 80th Street
New York, NY 10021
United States

Joseph J. Kerstein (Contact Author)

Yeshiva University - Syms School of Business ( email )

United States

Kyoo-Hwan Lee

Zicklin School of Business, Baruch College - The City University of New York

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

Steven B. Lilien

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

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3163 (Phone)
646-312-3161 (Fax)

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