Earnings Management Surrounding New Debt Issues


  • 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.

Corresponding author: Whittemore School of Business and Economics, University of New Hampshire, 15 Academic Way, Durham, NH 03824, Phone: 603-862-3357; Fax: 603-862-2283; E-mail: yixin.liu@unh.edu.


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.