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Real earnings management and the cost of debt capital: international evidence

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  • Ji Hye Kim
  • Sang Ho Lee
  • Yong Keun Yoo

Abstract

This study examines the association between the extent of real earnings management and the cost of debt capital in an international setting. Using a sample of 14,654 observations across 18 countries from 1987 to 2013, we find that on average, the extent of real earnings management is positively associated with the cost of debt capital. Moreover, we find that debt investors impose more premiums on the cost of debt capital for the firms in countries with more developed debt markets. This study contributes to the literature in the following ways: To begin with, this is the first international study to examine the effect of firms’ real earnings management on the cost of debt capital. Next, this study suggests that the association between the extent of real earnings management and the cost of debt capital varies depending on the institutional environment of the country a firm is based in. Finally, this study implies that financial policy makers need to extend bond market development in order to encourage debt investors to price the negative effects of real earnings management on the firm’s future performance.

Suggested Citation

  • Ji Hye Kim & Sang Ho Lee & Yong Keun Yoo, 2020. "Real earnings management and the cost of debt capital: international evidence," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 27(2), pages 151-172, March.
    • Handle: RePEc:taf:raaexx:v:27:y:2020:i:2:p:151-172
    DOI: 10.1080/16081625.2018.1518148
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    Citations

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    Cited by:

    1. Roman Blazek & Pavol Durana & Katarina Valaskova, 2020. "Creative Accounting as an Apparatus for Reporting Profits in Agribusiness," JRFM, MDPI, vol. 13(11), pages 1-19, October.
    2. Emmanuel Mensah & Joseph Kwadwo Tuffour & Mamdouh Abdulaziz Saleh Al-Faryan, 2023. "Does macroeconomic misery index matter in the micro firm-level earnings Management – performance nexus? Evidence from dynamic Panel threshold regression," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2289321-228, October.
    3. Fernando Comiran & Subprasiri Siriviriyakul, 2023. "Detecting overproduction: Evidence from inventory write‐down," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3351-3386, September.
    4. Khayria Amarna & Raquel Garde Sánchez & Maria Victoria López‐Pérez & Mahmoud Marzouk, 2024. "The effect of environmental, social, and governance disclosure and real earning management on the cost of financing," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 3181-3193, July.
    5. Ahsan Habib & Dinithi Ranasinghe & Julia Yonghua Wu & Pallab Kumar Biswas & Fawad Ahmad, 2022. "Real earnings management: A review of the international literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4279-4344, December.
    6. Karan Gandhi, 2024. "Real earnings management’s effects on performance in firms reaching the loss avoidance threshold: indian evidence after controlling for variations in firm’s competitive strategy," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 51(3), pages 369-395, September.

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