Department of Finance and International Business, Fu Jen Catholic University,Department of Accounting, Fu Jen Catholic University
Abstract:
This study examines the accounting information uncertainty effects on corporate credit risk from the perspective of real earnings management activities (RM) by investigating 9,570 American bond observations from year 2001 to 2008. Following Roychowdhury (2006), this work employs the abnormal levels of cash flow from operations (R_CFO), production costs (R_PROD), and discretionary expenses (R_DISX) to measure the RM activities. The main results of this study show that the volatilities of RM activities significantly and positively affect corporate bond yield spreads when controlling for well-known bond spread determinant variables, especially for the R_CFO volatility. This research also finds that the positive effects of RM volatilities become weaker when a firm has lower credit rating. Additionally, the R_CFO level negatively relates to corporate credit risk. The above results are also robust when controlling for cash flow volatility, accrual quality and credit ratings.
