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Earnings Management Surrounding New Debt Issues

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  • Yixin Liu
  • Yixi Ning
  • Wallace N. Davidson III

Abstract

We examine whether firms manage earnings before issuing bonds to achieve a lower cost of borrowing. We find significant income‐increasing earnings management prior to bond offerings. We also find that firms that manage earnings upward issue debt at a lower cost, after controlling for various bond issuer and issue characteristics. Our results are consistent with studies that report earnings management around equity issuance. The results indicate that, like equity holders, bondholders fail to see through the inflated earnings numbers in pricing new debt.

Suggested Citation

  • Yixin Liu & Yixi Ning & Wallace N. Davidson III, 2010. "Earnings Management Surrounding New Debt Issues," The Financial Review, Eastern Finance Association, vol. 45(3), pages 659-681, August.
    • Handle: RePEc:bla:finrev:v:45:y:2010:i:3:p:659-681
    DOI: 10.1111/j.1540-6288.2010.00265.x
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