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Distinctive Features of BBB- and BB-Graded Firms Using Earnings Management and Conservatism: Evidence from the Korean Market

Author

Listed:
  • Youngtae Yoo

    (Incheon National University, 406-772, 119, Academy-ro, Yeonsu-gu, Incheon, Korea)

  • Jaehong Lee

    (Yonsei Business Research Institute, 120-749, 50, Yonsei-ro, Seodaemoon-gu, Seoul, Korea)

  • Jinho Chang

    (Business Administration, Yonsei University, 120-749, 50, Yonsei-ro, Seodaemoon-gu, Seoul, Korea)

Abstract

The purpose of this paper is to inform investors of differences in opportunistic behavior between managers of BBB- and BB-graded firms as measured by earnings management and accounting conservatism. Previous studies investigate the gaps between grades and between investment and speculative grades by grouping together the various characteristics of investment and speculative firms, assuming that the incentives to make significant economic changes are homogeneously the same. However, this study demonstrates that this is not the case. Using 1,225 Korean firm-year observations, we identify noteworthy features distinguishing BBB- and BB-graded firms. More specifically, in BBB-graded firms, discretionary accruals (DACC) (a proxy used to represent earnings management) are larger than those in BB-graded firms. As for accounting conservatism, BB-graded firms exhibit a higher degree of conservatism than BBB-graded firms. According to the conventional credit rating scenario, higher-graded firms have fewer DACC and are more conservative in comparison with firms of lower grades. However, the results of this study imply that the reverse is true for firms of grades BBB and BB, which are commonly accepted as straddling the border between investment and speculative grades.

Suggested Citation

  • Youngtae Yoo & Jaehong Lee & Jinho Chang, 2014. "Distinctive Features of BBB- and BB-Graded Firms Using Earnings Management and Conservatism: Evidence from the Korean Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-31.
    • Handle: RePEc:wsi:rpbfmp:v:17:y:2014:i:01:n:s0219091514500052
    DOI: 10.1142/S0219091514500052
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    References listed on IDEAS

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    1. Jens Hilscher & Mungo Wilson, 2011. "Credit ratings and credit risk," Working Papers 31, Brandeis University, Department of Economics and International Business School.
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    Cited by:

    1. Jun Guo & Pinghsun Huang & Yan Zhang, 2019. "Do debt covenant violations serve as a risk factor of ineffective internal control?," Review of Quantitative Finance and Accounting, Springer, vol. 52(1), pages 231-251, January.
    2. Mingzhi Liu & Michel Magnan, 2016. "Conditional conservatism and the yield spread of corporate bond issues," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 847-879, May.
    3. Eliza Xia Zhang, 2020. "The impact of cash flow management versus accruals management on credit rating performance and usage," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1163-1193, May.
    4. Qing L. Burke & Tim V. Eaton & Mengying Wang, 2019. "Trade liberalization and conditional accounting conservatism: evidence from import competition," Review of Quantitative Finance and Accounting, Springer, vol. 53(3), pages 811-844, October.
    5. Michael Lacina & B. Brian Lee & Dong Wuk Kim, 2018. "Management of Revenue and Earnings in Korean Firms Influenced by Cognitive Reference Points," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-36, June.

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    More about this item

    Keywords

    Credit ratings; managers' opportunistic behavior; discretionary accruals; accounting conservatism; BBB-graded firms; BB-graded firms;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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