ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Interest Coverage Ratio and Real Earnings Management

  • Yunsung Koh Hankuk University of Foreign Studies

Asian Tax Journal Vol. 14 No. 4 (2013), pp. 123-154

Abstract

This paper investigates whether the Interest Coverage Ratio which is a basic standard in identifying potentially insolvent enterprises on the stock market has an relationship with firms' Real Earnings Management using the non-finance firms listed on the Korea Stock Exchange over the 2004-2010 period. The results are summarized below. we test whether the Interest Coverage Ratio has an effect on the Real Earnings Management. The result of hypothesis1 shows that the Interest Coverage Ratio which is more than 1 in this year though less than 1 in last year(firms suspected of earning management) is positively associated with the Real Earnings Management significantly. This study has some contributions as follows. First, this study made an empirical examination about the effect of Interest Coverage Ratio on Real Earnings Management, which has been overlooked in prior studies. Second, this study presented the authorities and regulatory financial institutions with the need of paying attention to the firms that try to increase their Interest Coverage Ratio by using Real Earnings Management.

Keywords

  • Interest Coverage Ratio
  • Potentially Insolvent Enterprises
  • Real Earnings Management

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