Real Earnings Management Uncertainty and Corporate Credit Risk
47 Pages Posted: 13 Apr 2014
Date Written: April 10, 2014
This study examines the accounting information uncertainty effects on corporate credit risk from the perspective of real earnings management (RM) activities by investigating 9,565 American bond observations from year 2001 to 2008. The main results show that the volatilities of RM activities significantly and positively affect corporate bond yield spreads when well-known bond spread determinant variables are controlled. In addition, the results are robust to alternative model specifications, including the suspect firm analyses, another less ambiguous measure of abnormal cash flows from operations, and abnormal production costs analyses in manufacturing industry or with control of the input price variation. This research also finds that the positive effects of RM volatilities become weaker if a firm has a lower credit rating. Finally, our results remain hold with considering endogeneity issues and analyst characteristic variables and for another estimation period of RM volatilities.
Keywords: Real earnings management activities; Accounting information uncertainty; Credit risk; Bond yield spreads
JEL Classification: G12; G32; G41; M41
Suggested Citation: Suggested Citation