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Lookup NU author(s): Professor Dimitrios Gounopoulos
This is the authors' accepted manuscript of an article that has been published in its final definitive form by Blackwell Publishing Ltd, 2017.
For re-use rights please refer to the publisher's terms and conditions.
© 2016 John Wiley & Sons Ltd This study examines the impact of having a credit rating on earnings management (EM) through accruals and real activities manipulation by initial public offering (IPO) firms. We find that firms going public with a credit rating are less likely to engage in income-enhancing accrual-based and real EM in the offering year. The monitoring by a credit rating agency (CRA) and the reduced information asymmetry due to the provision of a credit rating disincentivise rated issuers from managing earnings. We also suggest that the participation of a reputable auditing firm is crucial for CRAs to effectively restrain EM. Moreover, we document that for unrated issuers, at-issue income-increasing EM is not linked to future earnings and is negatively related to post-issue long-run stock performance. However, for rated issuers, at-issue income-increasing EM is positively associated with subsequent accounting performance and is unrelated to long-run stock performance following the offering. The evidence indicates that managers in unrated firms generally manipulate earnings to mislead investors, while managers in rated firms tend to exercise their accounting and operating discretion for informative purposes.
Author(s): Gounopoulos D, Pham H
Publication type: Article
Publication status: Published
Journal: Journal of Business Finance and Accounting
Year: 2017
Volume: 44
Issue: 1-2
Pages: 154-195
Print publication date: 01/01/2017
Online publication date: 27/10/2016
Acceptance date: 14/10/2016
Date deposited: 15/12/2017
ISSN (print): 0306-686X
ISSN (electronic): 1468-5957
Publisher: Blackwell Publishing Ltd
URL: https://doi.org/10.1111/jbfa.12228
DOI: 10.1111/jbfa.12228
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