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The effect of earnings management on external loan price: evidence from China

Author

Listed:
  • Rong Huang
  • Xiaojun Lin
  • Xunzhuo Xi
  • Desmond Chun Yip Yuen

Abstract

Purpose - This paper aims to explore how external creditors assess firms’ financial aggressiveness in China. Design/methodology/approach - Using bank loan-specific data, the authors investigate whether firms exhibit greater costs of bank loans when they engage in earnings manipulation and whether this association changes when restrictions on lenders’ compensation are promulgated. Findings - The authors find compelling evidence that bank executives charge higher premiums on firms with accrual earnings management to compensate for additional financial risk but do not charge extra loan prices for firms conducting real earnings management (REM). The authors also find that the enactment of Robust Bank Executive Compensation (REBC) enhances the vigilance of bank executives on the overall client firms’ earnings manipulation, with the exception of REM conducted by state-owned firms. Originality/value - The authors extend the current literature on the cost of external loans by focusing on bank loans and the influence of REBC. This study offers implications for policymakers in China and other emerging economics to control loan default and financial risk.

Suggested Citation

  • Rong Huang & Xiaojun Lin & Xunzhuo Xi & Desmond Chun Yip Yuen, 2022. "The effect of earnings management on external loan price: evidence from China," International Journal of Accounting & Information Management, Emerald Group Publishing Limited, vol. 30(2), pages 277-300, March.
    • Handle: RePEc:eme:ijaimp:ijaim-11-2021-0225
    DOI: 10.1108/IJAIM-11-2021-0225
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    More about this item

    Keywords

    Earnings management; Cost of external loans; Robust bank executive compensation; Agency problem; G2; G21; M4; M48;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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