ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

A Study on the Relations of Earings Management to Difference between Announced and Expected Credit Rating

  • Yoo Jiyeon Hanyang University

Asian Tax Journal Vol. 18 No. 5 (2017), pp. 31-54

Abstract

This paper is examines whether firms experiencing difference between published credit rating and expected rating engage in earnings management activities. Also, we examine whether credit rating agencies detect and reflect earnings management behavior to the credit ratings. If the announced credit ratings are lower than expected ratings then the firms are undervalued than their expected. If so they have difficulty financing then the firms have to an incentive to improve credit ratings for expected rating. This study verify that whether firms manages earnings when the credit rating agencies announced lower than expected ratings. And analyze how earnings management are reflected in credit ratings. Our sample consists of the firms listed on Korean Stock Exchange over the period of 2001 to 2014. The empirical results of this study are as follows. We find more earnings management when the credit rating lower than expected ratings. The results shows that difference between credit ratings and expected rating engage in earnings management activities. Next year, the difference between credit rating and expected rating appear larger in earnings management firms. This can be interpreted that the credit rating agencies have detected the activity of earnings management and reflect on credit rating about the earnings management. Our study is considered meaningful in that, extending credit rating and earnings management literature, we verified the incentive of earnings management according to difference between published credit rating and expected rating. Expected credit rating carries management’s incentives to overstate or understate reported earnings in order to affect published credit rating. In addition, we contribute to the literature by examining whether credit rating agencies reflect those earnings management behavior and, in turn, whether the gap between published and expected credit rating increases or decreases.

Keywords

  • Credit rating
  • Expected rating
  • Earnings management

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Asian Tax Journal

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