Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market?

Using discretionary current accruals, we study the earnings management (EM) efforts of firms surrounding seasoned bond offerings. Our results indicate significant EM efforts by issuers in the year of the offering, which is consistent with the notion that issuers attempt to “window dress” their firms...

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Main Authors: Caton, Gary, CHIYACHANTANA, Chiraphol New, CHUA, Choong Tze, GOH, Choo Yong, Jeremy
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Language:English
Published: Institutional Knowledge at Singapore Management University 2009
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Online Access:https://ink.library.smu.edu.sg/lkcsb_research/1799
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spelling sg-smu-ink.lkcsb_research-27982010-09-23T06:24:04Z Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market? Caton, Gary CHIYACHANTANA, Chiraphol New CHUA, Choong Tze GOH, Choo Yong, Jeremy Using discretionary current accruals, we study the earnings management (EM) efforts of firms surrounding seasoned bond offerings. Our results indicate significant EM efforts by issuers in the year of the offering, which is consistent with the notion that issuers attempt to “window dress” their firms’ performance prior to an offering. When we partition the sample based on the new bonds’ ratings, however, we find that EM efforts differ across ratings groups. Firms with bonds rated single-A and triple-B tend to significantly manage their earnings upwards in the year of the offering, while more highly rated firms do not. Firms rated double-B and single-B manage their earnings every year from three years prior to the offering but discontinue their efforts once they obtain their funding. For the market to be misled by a firm’s EM efforts, however, the initial bond rating must be inflated, and the rating should be downgraded after the offering for the most aggressive earnings managers. To the contrary, we find relatively fewer rating downgrades for firms with relatively heavy EM efforts. We conclude that while firms making seasoned bond offerings may attempt to dupe the bond market by managing their earnings upwards, the rating agencies see through those efforts and may penalize such firms with a lower initial rating. 2009-10-21T07:00:00Z text https://ink.library.smu.edu.sg/lkcsb_research/1799 Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Finance and Financial Management Portfolio and Security Analysis
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Finance and Financial Management
Portfolio and Security Analysis
spellingShingle Finance and Financial Management
Portfolio and Security Analysis
Caton, Gary
CHIYACHANTANA, Chiraphol New
CHUA, Choong Tze
GOH, Choo Yong, Jeremy
Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market?
description Using discretionary current accruals, we study the earnings management (EM) efforts of firms surrounding seasoned bond offerings. Our results indicate significant EM efforts by issuers in the year of the offering, which is consistent with the notion that issuers attempt to “window dress” their firms’ performance prior to an offering. When we partition the sample based on the new bonds’ ratings, however, we find that EM efforts differ across ratings groups. Firms with bonds rated single-A and triple-B tend to significantly manage their earnings upwards in the year of the offering, while more highly rated firms do not. Firms rated double-B and single-B manage their earnings every year from three years prior to the offering but discontinue their efforts once they obtain their funding. For the market to be misled by a firm’s EM efforts, however, the initial bond rating must be inflated, and the rating should be downgraded after the offering for the most aggressive earnings managers. To the contrary, we find relatively fewer rating downgrades for firms with relatively heavy EM efforts. We conclude that while firms making seasoned bond offerings may attempt to dupe the bond market by managing their earnings upwards, the rating agencies see through those efforts and may penalize such firms with a lower initial rating.
format text
author Caton, Gary
CHIYACHANTANA, Chiraphol New
CHUA, Choong Tze
GOH, Choo Yong, Jeremy
author_facet Caton, Gary
CHIYACHANTANA, Chiraphol New
CHUA, Choong Tze
GOH, Choo Yong, Jeremy
author_sort Caton, Gary
title Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market?
title_short Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market?
title_full Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market?
title_fullStr Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market?
title_full_unstemmed Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market?
title_sort earnings management and seasoned bond offerings: do managers mislead the bond market?
publisher Institutional Knowledge at Singapore Management University
publishDate 2009
url https://ink.library.smu.edu.sg/lkcsb_research/1799
_version_ 1770570023993081856