The authors would like to thank Matthew T. Billett, Arnie Cowan, Jon Garfinkel, Erik Lie, and two anonymous referees for their helpful comments and suggestions. All errors are our own.
Earnings Management Surrounding New Debt Issues
Article first published online: 13 JUL 2010
© 2010, The Eastern Finance Association
Volume 45, Issue 3, pages 659–681, August 2010
How to Cite
Liu, Y., Ning, Y. and Davidson III, W. N. (2010), Earnings Management Surrounding New Debt Issues. Financial Review, 45: 659–681. doi: 10.1111/j.1540-6288.2010.00265.x
- Issue published online: 13 JUL 2010
- Article first published online: 13 JUL 2010
- earnings management;
- cost of debt;
- securities offerings
We examine whether firms manage earnings before issuing bonds to achieve a lower cost of borrowing. We find significant income-increasing earnings management prior to bond offerings. We also find that firms that manage earnings upward issue debt at a lower cost, after controlling for various bond issuer and issue characteristics. Our results are consistent with studies that report earnings management around equity issuance. The results indicate that, like equity holders, bondholders fail to see through the inflated earnings numbers in pricing new debt.