Can Discretionary Accruals Help Company Ease Financial Constraints?

R.L.Watts & J.L.Zimmerman (1978) proposed the concept of accounting choice, and then developed the concept of earnings management. Since then the study of earnings management has not been terminated, The later researches included earnings management motivation, measurement, influence factors, economic consequences, but McNichols& Stubben (2008) pointed out that although there are a lot of literatures about earnings management, the literatures about earnings management and internal decision-making are relatively scarce.Discretionary accruals and earnings management has homology, the reason why this paper use discretionary accrual is mainly in order to distinguish the research on earnings management in general, and the Healy & Wahlen (1999) said, if the company’s management observe criteria and take use rationally of accounting choice to transfer the market a better earnings information, this behavior is different from the earnings management behavior which is always under increasing criticism. That is to say, earnings management is mostly understood as negative behavior, and this paper studies the positive side of earnings management. At the same time, this paper focus on financing constrained firms, and we assume that financially constrained firm with valuable projects can use discretionary accruals to credibly signal positive prospects, enabling it to raise capital to undertake the investments.In this paper, we test the 2006-2013 panel data, and use the adjusted Jones model to measure discretionary accruals and use the KZ (1997) model to estimate the investment opportunities, and use the method of grouping test, regression and other methods to carry out empirical test. The main conclusions are as follows:The financing constrained firms have relatively more discretionary accruals than the non-financing constrained firms. We also find that financially constrained firms with good investment opportunities have significantly higher discretionary accruals prior to investment compared to their unconstrained counterparts. Constrained high-accrual firms obtain more equity and debt financing, and invest in projects that appear to improve performance. These results provide supported evidence that the use of discretionary accruals can help constrained firms with valuable projects ease those constraints and increase firm value.