Beating earnings benchmarks and the cost of debt

Accounting Review

Volumn 83, Issue 2, 2008, Pages 377-416

  Jiang, John ^a  

^a MICHIGAN STATE UNIVERSITY   (United States)

Author keywords

Cost of debt; Credit ratings; Earnings benchmarks; Yield spread

Indexed keywords

EID: 41949090088     PISSN: 00014826     EISSN: None     Source Type: Journal    
DOI: 10.2308/accr.2008.83.2.377     Document Type: Article

References (79)

1. Ahmed, A., B. Billing, R. Morton, and M. Stanford-Harris. 2002. The role of accounting conservatism in mitigating bondholder-shareholder conflicts over dividend policy and in reducing cost of debts. The Accounting Review 77: 867-890.
2. Ali, A., L. Hwang, and M. Trombley. 2000. Accruals and future stock returns: Tests of native investor hypothesis. Journal of Accounting, Auditing, and Finance 15: 161-181.
3. Anthony, J., B. Bettinghaus, and D. Farber. 2006. The magnitude, frequency, and limiting factors of earnings management for capital market purposes: Evidence from the issuance of public debt and equity securities. Working paper, Michigan State University.
4. Asquith, P., A. Beatty, and J. Weber. 2005. Performance pricing in bank debt contracts. Journal of Accounting and Economics 40: 101-128.
5. Ayers, B., and R. Freeman. 2003. Evidence that analyst following and institutional ownership accelerate the pricing of future earnings. Review of Accounting Studies 8: 47-67.
6. J. Jiang, and E. Yeung. 2006. Discretionary accruals and earnings management: An analysis of pseudo earnings targets. The Accounting Review 81: 617-652.
7. Baber, W, and S-H. Kang. 2002. The impact of split adjusting and rounding on analysts' forecast error calculations. Accounting Horizons 16: 277-289.
8. Ball, R., and P. Brown. 1968. An empirical evaluation of accounting income numbers. Journal of Accounting and Research 6: 159-178.
9. Barth, M., J. Elliot, and M. Finn. 1999. Market rewards associated with patterns of increasing earnings. Journal of Accounting Research 37: 387-413.
10. Bartov, E., S. Radhakrishnan, and I. Krinsky. 2000. Investor sophistication and patterns in stock returns after earnings announcements. The Accounting Review 75: 43-63.
11. D. Givoly, and C. Hayn. 2002. The rewards to meeting or beating earnings expectations. Journal of Accounting and Economics 33: 173-204.
12. Battalio, R., and R. Mendenhall. 2005. Earnings expectations, investor trade size, and anomalous returns around earnings announcements. Journal of Financial Economics 77: 289-319.
13. Beatty, A., J. Yu., and J. Weber. 2007. Conservatism and debt. Journal of Accounting and Economics (forthcoming).
14. Beaver, W. 1968. The information content of annual earnings announcements. Journal of Accounting Research 6 (Supplement): 67-92.
15. Begley, J., and R. Freedman. 2004. The changing role of accounting numbers in public lending agreements. Accounting Horizon 18: 81-96.
16. Bens, D., V. Nagar, D. Skinner, and F. Wong. 2003. Employee stock options, EPS dilution, and stock repurchases. Journal of Accounting and Economics 36: 51-90.
17. Bhojraj, S., and P. Sengupta. 2003. Effect of corporate governance on bond ratings and yields: The role of institutional investors and the outside directors. Journal of Business 76: 455-475.
18. and B. Swaminathan. 2004. How does the corporate bond market value capital investments and accruals? Working paper, Cornell University.
19. Blume, M., F. Lim, and C. MacKinlay. 1998. The declining credit quality of U.S. corporate debt: Myth or reality? Journal of Finance 53: 1389-1413.
20. Brown, L. 1991. Forecast selection when all forecasts are not equally recent. International Journal of Forecasting 7: 349-356.
21. and K. Kim. 1991. Timely aggregate analyst forecast as better proxies for market earnings expectations. Journal of Accounting Research 29: 382-385.
22. and M. Caylor. 2005. A temporal analysis of thresholds: Propensities and valuation consequences. The Accounting Review 2: 423-440.
23. Burgstahler, D. 1997. Incentives to manage earnings to avoid earnings decreases and losses: Evidence from quarter earnings. Working paper, University of Washington.
24. and I. Dichev. 1997. Earnings management to avoid earnings decreases and losses. Journal of Accounting Economics 24: 99-126.
25. and M. Eames. 2002. Management of earnings and analysts' forecasts to achieve zero and small positive earnings surprises. Working paper, University of Washington and Santa Clara University.
26. Campbell, J., and G. Taksler. 2003. Equity volatility and corporate bond yields. Journal of Finance 58: 2321-2349.
27. Collins, D., G. Gong, and P. Hribar. 2003. Investor sophistication and mispricing of accruals. Review of Accounting Studies 8: 251-276.
28. Datta, S., and U. Dhillon. 1993. Bond and stock market response to unexpected earnings announcements. Journal of Financial and Quantitative Analysis 28: 565-577.
29. DeAngelo, H., L. DeAngelo., K. Wruck. 2002. Asset liquidity, debt covenants, and managerial discretion in financial distress: The collapse of L. A. Gear. Journal of Financial Economics 64: 3-34.
30. Dechow, P., S. Richardson, and I. Tuna. 2003. Why are earnings kinky? Review of Accounting Studies 8: 355-384.
31. Degeorge, F., J. Patel, and R. Zeckhauser. 1999. Earnings management to exceed thresholds. Journal of Business 72: 1-32.
32. Denis, D., and V. Mihov. 2003. The choice among bank debt, non-bank private debt, and public debt: Evidence from new corporate borrowings. Journal of Financial Economics 70: 3-28.
33. Dhaliwal, D., C. Gleason, and L. Mills. 2004. Last chance earnings management: using the tax expense to meet analysts' forecasts. Contemporary Accounting Research 21: 431-459.
34. Dichev, I., and J. Piotroski. 2001. The long-run stock returns following bond ratings changes. Journal of Finance 56: 173-203.
35. Ederington, L., and J. Yawitz. 1987. The rating process. In Handbook of Financial Markets and Institutions, 6th edition, edited by E. Altman. New York, NY: John Wiley & Sons.
36. Faulkender, M., and M. Petersen. 2006. Does the source of capital affect capital structure? Review of Financial Studies 19: 45-79.
37. Fisher, L. 1959. Determinants of risk premiums on corporate bonds, Journal of Political Economy 67: 217-237.
38. Fisher, P., and R. Verrecchia. 1997. The effect of limited liability on the market response to disclosure. Contemporary Accounting Research 14: 515-541.
39. Francis, J., R. LaFond, P. Olsson, and K. Schipper. 2005. The market pricing of accruals quality. Journal of Accounting and Economics 39: 295-327.
40. Frank, M., and S. Rego. 2004. Do managers use the valuation allowance account to manage earnings around certain earnings targets? Working paper, University of Virginia and The University of Iowa.
41. Hand, J. 1990. A test of the extended functional fixation hypothesis. The Accounting Review 65: 740-763.
42. R. Holthausen, and R. Leftwich. 1992. The effect of bond rating agency announcements on bond and stock prices. Journal of Finance 47: 733-752.
43. Hayn, C. 1995. The information content of losses. Journal of Accounting Economics 20: 125-153.
44. Holthausen, R., and R. Leftwich. 1986. The effect of bond rating changes on common stock prices. Journal of Financial Economics 17: 57-89.
45. and R. Watts. 2001. The relevance of the value relevance literature for financial accounting standard setting. Journal of Accounting and Economics 31: 3-75.
46. Hong, G., and A. Warga. 2000. An empirical study of bond market transactions. Financial Analyst Journal (March/April): 32-46.
47. Jiambalvo, J., S. Rajgopal, and M. Venkatachalam. 2002. Institutional ownership and the extent to which stock prices reflect future earnings. Contemporary Accounting Research 19: 117-145.
48. Kahneman, D., and A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econo metrica 47: 263-291.
49. Kaplan, R., and G. Urwitz. 1979. Statistical models of bond ratings: A methodological inquiry. Journal of Business 52: 231-261.
50. Kasznik, R., and M. McNichols. 2002. Does meeting expectations matter: Evidence from analyst revisions and share prices. Journal of Accounting Research 40: 727-759.
51. Kennedy, P. 1998. A Guide to Econometrics. 4th edition. Cambridge, MA: MIT Press.
52. Khurana, I., and K. Raman. 2003. Are fundamentals priced in the bond market? Contemporary Accounting Research 20: 495-494.
53. Levitt, A. 1998. The numbers game. Remarks delivered at New York University Center for Law and Business, New York, NY. September 28. Available at: http://www.sec.gov/news/speech/speecharchive/1998/spch220.txt.
54. Lopez, T. and L. Rees. 2002. The effect of beating and missing analysts' forecasts on the information content of unexpected earnings. Journal of Accounting, Auditing, and Finance 17: 155-184.
55. Maddala. G. 2001. Introduction to Econometrics. 3rd edition. Chichester, U.K.: John Wiley & Sons.
56. Matsunaga, S., and C. Park. 2001. The effect of missing a quarterly earnings benchmark on the CEO's annual bonus. The Accounting Review 76: 313-332.
57. Minton, B., and C. Schrand. 1999. The impact of cash flow volatility on discretionary investment and the costs of debt and equity financing. Journal of Financial Economics 54: 423-460.
58. Morgan, D. 2002. Rating banks: Risk and uncertainty in an opaque industry. The American Economic Review 92 (4): 874-888.
59. Myers, L., and D. Skinner. 2002. Earnings momentum and earnings management. Working paper, University of Illinois and University of Michigan.
60. Payne, J., and W. Thomas. 2003. The implications of using stock-split adjusted I/B/E/S data in empirical research. The Accounting Review 78: 1049-1067.
61. Pettit, J., C. Fitt, S. Orlov, and A. Kalsekar. 2004. The New World of Credit Ratings. New York, NY: UBS AG. Available at: http://ssrn.com/ abstract=593522.
62. Plummer, C., and S. Tse. 1999. The effect of limited liability on the informativeness of earnings: evidence from the stock and bond markets. Contemporary Accounting Research 16 (3): 541-574.
63. Reason, T. 2002. Not trigger happy. CFO Magazine (February 21). Available at: http://www.cfo.com/article.cfm/3003242?f=search.
64. Rogers, W. 1993. Regression standard errors in clustered samples. Stata Technical Bulletin 13: 19-23.
65. Roychowdhury, S. 2006. Earnings management through real activities manipulation. Journal of Accounting and Economics 42 (3): 335-370.
66. Securities and Exchange Commission (SEC). 2003. Report on the role and function of credit rating agencies in the operation of the securities markets. Available at: http://www.sec.gov/news/studies/credratingreport0103.pdf.
67. Sengupta, P. 1998. Corporate disclosure quality and the cost of debt. The Accounting Review 73: 459-474.
68. Shi, C. 2003. On the trade-off between the future benefits and riskiness of R&D: A bondholders' perspective. Journal of Accounting and Economics 35: 227-254.
69. Skinner, D., and R. Sloan. 2002. Earnings surprises, growth expectations and stock returns or don't let an earnings torpedo sink your portfolio. Review of Accounting Studies 7: 289-312.
70. Sloan, R. G. 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review 71: 289-315.
71. Smith, C. 1986. Investment banking and the capital acquisition process. Journal of Financial Economics 15: 3-29.
72. Thomson Financial. 2004. Global/U.S. Capital Markets: Another Year... Another Record. New York, NY: Thomson Financial.
73. Walther, B. 1997. Investor sophistication and market earnings expectations. Journal of Accounting Research 35: 157-179.
74. White, H. 1980. A heteroscedasticity-consistent covariance matrix estimator and a direct test for heteroscedasticity. Econometrica 4: 817-838.
75. Wooldridge, J. 2000. Introductory Econometrics: A Modern Approach. Cincinnati, OH: South-Western.
76. 2002. Econometric Analysis of Cross-Section and Panel Data. Cambridge, MA: MIT Press.
77. Xue, Y. 2005. Information content of earnings management: Evidence from managing earnings to exceed thresholds. Working paper, The University of Texas at Austin.
78. Yu, F. 2005. Accounting transparency and the term structure of credit spreads. Journal of Financial Economics 75: 53-84.
79. Ziebart, D., and S. Reiter. 1992. Bond ratings, bond yields and financial information. Contemporary Accounting Research 9: 252-282.