• The Impact of Earnings Management on the Choice of Debt Maturity Structure

Abstract

The present study distinguishes itself from the prior related works by demonstrating the relationship between earnings management behavior and the debt maturity structures of firms. Since it is well documented that firms managing earnings aggressively result in significant impacts on stock performance subsequently, we also go on to measure the long-run stock performance subsequent to the debt offers.

Our empirical evidences reveal that those firms which engage in the aggressive management of earnings have incentives to issue debt with longer-term maturity in order to avoid frequent outside monitoring and the higher costs involved in the issuing of short-term debt. We also find that the stocks of those firms characterized by such aggressive earnings management demonstrate long-run underperformance. This result is consistent with the findings in the majority of the prior studies within the literature on earnings management (including those on IPOs and SEO), that the earnings management hypothesis actually extends to debt offers. Moreover, our empirical results suggest that the firm size, which has not been examined rigorously in prior literature, is non-linearly associated with debt maturity structures.

Keywords: Debt Maturity, Earnings Management, Long-Run Performance