Effects of earnings management on bank cost of debt
Article first published online: 27 NOV 2011
© 2011 The Authors. Accounting and Finance © 2011 AFAANZ
Accounting & Finance
Volume 53, Issue 1, pages 265–300, March 2013
How to Cite
Shen, C.-H. and Huang, Y.-L. (2013), Effects of earnings management on bank cost of debt. Accounting & Finance, 53: 265–300. doi: 10.1111/j.1467-629X.2011.00455.x
- Issue published online: 15 MAR 2013
- Article first published online: 27 NOV 2011
- Received 13 April 2010; accepted 20 October 2011 by Robert Faff (Editor).
- Credit rating;
- Earnings management;
- Earnings smoothing;
- Discretionary loan loss provision;
- Information asymmetry
This study investigates how earnings management influences credit ratings, and thus the cost of debt, using bank data from 85 countries. Using cross-country data also facilitates the investigation of how information asymmetry affects the influence of earnings management on ratings. The results indicate that raters downgrade ratings when they perceive earnings management, after controlling for other potential determinants of bank credit ratings, implying that earnings management increases borrowing costs. The negative effect of earnings management is mitigated for banks in countries with more extensive and effective banking regulations owing to lower information asymmetry, but aggravated in counties with less robust banking regulations.