Beating Earnings Benchmarks via Real Activities Manipulation: Debt Market Effects

• In Event: Financial Accounting and Reporting I

Abstract

We investigate the relation between firms that meet or beat earnings benchmarks by managing earnings via real activities manipulation and their cost of debt. We find strong evidence that firms that manage EPS through abnormal share repurchases realize an attenuated cost of debt decrease associated with beating earnings benchmarks. We find weaker evidence of this effect for firms managing earnings through cash flows from operations, production costs, and aggregate measures taken from prior literature. Overall, our results suggest that debt market participants are concerned with the obfuscation of performance and/or direct cash flow effects of real activity manipulation.

Authors

• Timothy Paul Hinkel, The University of Arizona

• Benjamin Hoffman, Kent State University