Debt Issuance and Engagement in Earnings Management for U.S. Public Firms: A Study of Occurrence and Market Reactions From a Heterogeneous Debt Perspective
Master thesis
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Date
2021Metadata
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- Master of Science [1622]
Abstract
This thesis analyzes the relationship between earnings management and debt
issuance and further addresses to what extent the market is able to detect earnings
being managed in conjunction with debt issuance. It contributes to existing literature
by addressing this from a heterogeneous debt perspective, looking at subcategories of
loans and bonds. We draw on relevant existing literature on debt and capital
structure, credit rating distributions, detection of earnings management and
cumulative abnormal returns.
The thesis is based on U.S. public firms for 1996-2020, and variations of the
Modified Jones model with ROA are used to detect earnings management.
Additional econometric specifications are added to the original model in an attempt
to increase the reliability of the model. Further, debt and capital structure regressions
and event studies on issuance of different debt types construct the basis for our
analysis.
Debt and capital structure regressions indicate a strong relationship between debt
issuance and proxies for engagement in earnings management, with clear differences
between the different types of debt. Our event studies indicate that the market is not
able to detect firms' engagement in earnings management in conjunction with debt
issuance. Additionally, there are clear differences in market reactions for the different
types of debt. Our findings suggest that debt heterogeneity should be emphasized to a
greater extent for future research investigating the relationship between debt and
earnings management.
Description
Masteroppgave(MSc) in Master of Science in Accounting and Business Control, - Handelshøyskolen BI, 2021