Credit Rating Changes And Earnings Management

This paper studies the impact of credit rating changes’motivation on earnings management. Based on the following considerations, the author chooses this topic: although the study of earnings management has proceeded for more than20years in our country, there are few articles discussed the earnings management prior to changes of credit rating, especially from the sight of the real earnings management.In this paper, the research starts from the credit rating of listed companies which directly affect debt financing costs and ultimately influence the total financing costs. Therefore, in order to reduce the debt financing costs, management has a strong incentive to improve the credit rating. As firms’earnings information is the main factor of credit rating, so when the listed companies’ operating performance are not able to get a significant boost in a short term, management can only beauty the earnings information by surplus means. However, due to the rating agencies can identify the accrual-based earnings management and then punish them, companies would be more inclined to the real earnings management to reach the purpose of improving enterprise surplus.Through the empirical study, it can be found that before the credit rating changes, firm’s behavior of accrual-based earnings management is restrained, while the real earnings management is upwards distinctly, and managers will choose the ways of real earnings management.The following are the main contributions of this article. First, from the theoretical sense, it investigates the relationship between the motivation of credit rating changes and earnings management from the view of accrual-based earnings management, and real earnings management, which enriches the research of earnings management motivation in our country to some extent. Then, from a practical sense, since our bond market just started from the year2005, there are still some disadvantages in credit rating market, besides that, the indexes and methods of main credit rating from rating agencies are not perfect, and it has a lower recognition of real earnings management. So this article would be helpful to rating agencies to perfect its rating methods and strengthen the recognition of earnings management.The main limitation of our paper:firstly, because our bond market developed relatively late, the credit rating would exist only when the enterprise has financing needs in bond market, so the data sample is small during testing. Secondly, it is not strict to use the results to replace the motivation changes in credit rating, which may affect the robustness of the results. Thirdly, the influence of credit rating agencies’replacement is not included in the results of credit rating changes.