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Short-term debt maturity, monitoring and accruals-based earnings management

Fung, Simon Y. K. and Goodwin, John (2013) Short-term debt maturity, monitoring and accruals-based earnings management. Journal of Contemporary Accounting and Economics, 9 (1). pp. 67-82. ISSN 1815-5669

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Official URL: http://dx.doi.org/10.1016/j.jcae.2013.01.002

Abstract

Most prior studies assume a positive relation between debt and earnings management, consistent with the financial distress theory. However, the empirical evidence for financial distress theory is mixed. Another stream of studies argues that lenders of short-term debt play a monitoring role over management, especially when the firm’s creditworthiness is not in doubt. To explore the implications of these arguments on managers’ earnings management incentives, we examine a sample of US firms over the period 2003–2006 and find that short-term debt is positively associated with accruals-based earnings management (measured by discretionary accruals), consistent with the financial distress theory. We also find that this relation is significantly weaker for firms that are of higher creditworthiness (i.e. investment grade firms), consistent with monitoring benefits outweighing financial distress reasons for managing earnings.

Item Type:Article
Uncontrolled Keywords:Accruals-based earnings management; Short-term debt; Monitoring; Agency costs
Subjects:H Social Sciences > H Social Sciences (General)
ID Code:21677
Deposited By:John Goodwin
Deposited On:08 Jul 2013 15:36
Last Modified:08 Jul 2013 15:36

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