Earnings Management And The Cost Of Bonds Financing

Since Schipper proposed the concept of Earnings management in1989, Earnings management is always one of the hot topic in accounting profession. Large numbers of research by scholars at home and broad proved the universal exist of Earnings management. During the process of bonds issuance, the corporations have the incentives for Earnings management. The reason is that the bonds issuance, marketing and credit rating are mainly dependent on the earnings information released by corporation. In order to ingratiate supervision, make bonds issuance and marketing, improve credit rating and decrease the financing cost, the corporations will manage the earnings. This paper focuses on the relationship between Earnings management and bond market, research whether the bond holders can distinguish the issuers’ Earnings management. If can, whether they will "penalize" this behavior, for example improving the financing costs. The research will enrich the papers of Earnings management in bond market, improve the protection of the investors’ interest and supervision of bond market.According present research, earnings management is divided into Accrual-based earnings management and Real earnings management. The research at aboard started from Accrual-based earnings management, which only affects the future distribution of earnings, not the corporations’ internal economic activities, so it can’t affect the cash flow. With the laws and principal becoming strict, the strength of supervision increasing, so the risks of managing accrual is becoming big, the corporation is declined to Real earnings management because of its’ disguisedness and flexibility. The Real earnings management includes the manipulation of sales, production and discretionary expenditures, and it not only affects present earnings, but also the distribution of future cash flow, thus damages the enterprise’s long-term value and bond value. Therefore, if the enterprise manages earnings, earnings quality lows, the default risk of bond increases. If the market considers earnings management as opportunistic behavior, it requires high risk premium and increases the cost of bond financing.This paper studies the corporate bond combined with the research method of theory analysis and empirical analysis. During the process of theory analysis, this part uses The principal agent theory, Asymmetric information theory, Contract theory and Signaling theory, comprehensively analyzes the incentive of earnings management in bond market, and deduces the hypothesis on the basis of research papers at home and broad. During the process of empirical analysis, first I make descriptive statistic and correlation analysis to the samples, then make multiple linear regression analysis in order to prove the hypothesis. At last, I also make robustness test to prove the conclusion.This paper takes the sample of the2004-2011year’s data of corporation bonds marked in Shanghai Exchange Stock and Shenzhen Exchange Stock, and investigates the influence of earnings management on corporation bonds’ costs. After the multiple linear regression analysis, the study founds:the bond holders can effectively distinguish the Accrual-based earnings management, but can’t distinguish Real earnings management. In the robustness test, the credit rating agencies can neither distinguish the Accrual-based earnings management, nor Real earnings management. From the conclusions of controllable variables, I find that corporate size, profitability, growth and corporation governance have important influence on financing cost and credit rating.This paper mainly studies the relationship of earnings management and bond financing, the research including three parts-introduction, text and conclusion, six chaptersPart I is introduction. It includes research background, meaning, target, method, content and anticipated innovation.Part II is test,includes chapter two to chapter five.Chapter two is literature review. It first reviews the concept and three incentives hypothesis of earnings management, then concludes the bond research from the respects of the debts’corporate governance effect and the corporate governance factor affecting debt financing. and the reviews the studies of relationship of earnings management and debt financing. At last, I summarize the paper about the relationship between earnings management and debt financing in bond financing.Chapter three is theory analysis and research hypothesis. First, it reviews the principal agent theory, Asymmetric information theory, Contract theory and Signaling theory. On the basis of research, combined with the research and status quo of bond financing, deduces the hypothesis from accrual and real earnings managementChapter four is research design. The chapter takes the sample of the2004-2012year’s data of corporation bonds marked in Shanghai Exchange Stock and Shenzhen Exchange Stock, and simply describe the sample of year,industry,marketing place and credit rating. Drawing the existed research end according to the research purpose, the chapter designs the main variables and models.Chapter five is empirical analysis. First it makes descriptive statistic and correlation analysis to main variables, then in order to verify the hypothesis, it tests the relationship between earnings management and costs of bond financing from aspect of accrual and real earnings management. At last, it make robustness test.Part Ⅲ, also the chapter six, including research conclusion, the suggestion to bond market, research limitation and research outlook. First it draws the research conclusions, then combined with the research limitation and status quo of bond market, it makes pragmatic suggestions to bond holder, issuers,credit rating agency and regulatory authorities. Then it analyzes the limitation from samples and models, and proposes the future research of earnings management in bond market.The significance and anticipated innovation including:First, this paper studies the relationship between earnings management and bond financing from Accrual-based and Real earnings management, so it enriches the paper about earnings management and debt financing.Second, Twelfth Five-Year Plan points out that we should development bond market and improve the ratio of direct financing. The suggestions proposed are help to hence the price-detected function, perfect the institution of credit rating, and establish effective bond market. Third, in the earlier domestic literature, most scholars mainly studied the earnings management problems in the debt contract from bank loans, and little about earnings management in bond market. However, with the development of bond market, the function of financing and governance is highlighting, so it will be full of significance to study the earnings management in bond market.Fourth, the earlier literature studied the relationship between earnings management and debt financing from the aspect of Accrual-based earnings management, little from the aspect of Real earnings management. But more and more research show that the enterprise use real activities to manage earnings, and its’ affection to future is big. Therefore,studying the real earnings management in bond market is very important to healthy development of bond market.The research limitation and future research orientation include:(1)In the aspect of sample selection, by the reason of big data acquisition difficulty, the paper only chooses the corporate bonds. So, in the future research, we can consider other bond types such as the enterprise bond, short-term financing bills and long-term notes.(2) In the choice of models and variables, the model concerning Real earning model is less, the paper only uses Roychowdhury model. In the discretionary expense model, because of the high difficulties of acquiring the data of R&D, advertisement, employment and maintenance expense, the scholar use the sum of sales and management expense to measure the discretionary expense manipulation. So, in the future, scholars can ameliorate this model,or design different models according different incentives.(3) This paper concerns earnings management in bond distribution market, but in the secondary market, the disclosure is more complete, and the trading is more active. In the following time of bonds,the credit rating agency will tracking credit rating, and the corporation may issue bond again. So, we can consider the earnings management problem from secondary market in the future research.(4) This paper mainly consider the earnings management problem in bond market from financing cost, but in the contract of bond, it also includes bond age, issue size, recyclability of bond and other provisions, and those probably are affected by earnings management. So, we can do research in these aspects.