Earnings Management and Seasoned Bond Offerings: Do Managers Mislead the Bond Market?

Publication Type

Conference Paper

Publication Date



Using discretionary current accruals, we study the earnings management (EM) efforts of firms surrounding seasoned bond offerings. Our results indicate significant EM efforts by issuers in the year of the offering, which is consistent with the notion that issuers attempt to “window dress” their firms’ performance prior to an offering. When we partition the sample based on the new bonds’ ratings, however, we find that EM efforts differ across ratings groups. Firms with bonds rated single-A and triple-B tend to significantly manage their earnings upwards in the year of the offering, while more highly rated firms do not. Firms rated double-B and single-B manage their earnings every year from three years prior to the offering but discontinue their efforts once they obtain their funding. For the market to be misled by a firm’s EM efforts, however, the initial bond rating must be inflated, and the rating should be downgraded after the offering for the most aggressive earnings managers. To the contrary, we find relatively fewer rating downgrades for firms with relatively heavy EM efforts. We conclude that while firms making seasoned bond offerings may attempt to dupe the bond market by managing their earnings upwards, the rating agencies see through those efforts and may penalize such firms with a lower initial rating.


Finance and Financial Management | Portfolio and Security Analysis

Research Areas



Financial Management Association Annual Meeting, Reno, 21-24 October 2009

City or Country

Reno, NV, USA

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