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Earnings Management Surrounding Seasoned Bond Offerings: Do Managers Mislead Ratings Agencies and the Bond Market?

Published online by Cambridge University Press:  01 July 2011

Gary L. Caton ,
Chiraphol N. Chiyachantana ,
Choong-Tze Chua  and
Jeremy Goh
Gary L. Caton
Affiliation:
Montana State University, College of Business, PO Box 173040, Bozeman, MT 59717. [email protected]
Chiraphol N. Chiyachantana
Affiliation:
Singapore Management University, Lee Kong Chian School of Business, 50 Stamford Rd., Singapore 178899. [email protected]
Choong-Tze Chua
Affiliation:
Singapore Management University, Lee Kong Chian School of Business, 50 Stamford Rd., Singapore 178899. [email protected]
Jeremy Goh
Affiliation:
Singapore Management University, Lee Kong Chian School of Business, 50 Stamford Rd., Singapore 178899. [email protected]
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Abstract

We study earnings management (EM) efforts surrounding seasoned bond offerings using discretionary current accruals. We find that issuers tend to inflate earnings performance prior to an offering. In order for EM efforts to effectively mislead ratings agencies and the bond market, they must lead to inflated bond ratings and decreased offering yields. Regression results indicate the opposite; aggressive EM efforts are associated with lower initial ratings and higher offering yields. We also find a statistically lower proportion of subsequent downgrades for firms with the most aggressive EM efforts, which is inconsistent with these firms’ inflated initial ratings. While some firms may attempt to mislead ratings agencies and market participants by window-dressing earnings, these efforts appear to be counterproductive.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 3 , June 2011 , pp. 687 - 708
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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