We investigate whether firm managers have private information about the upcoming credit rating changes and also have incentives to affect the rating changes through income-increasing accruals manipulation or real activities earnings management. Using the large sample of U.S. data over the period of 1990-2011, we find that firms with upcoming credit rating changes are likely to engage in real activities earnings management, whereas they do not increase discretionary accruals before credit rating changes. The findings suggest that the firm’s management tries to influence the upcoming changes of credit ratings by actively engaging in real activities earnings management rather than accruals-based earnings management.
JEL classification: G30; G39
Keywords: Credit rating; Earnings management; Real activities management; Discretionary Accruals
