Effects of Credit Ratings on Earnings Management and CEO Turnover : Credit Ratings as Device for Screening and Monitoring Management
Hyun-Dong Kim
Byung-Uk Chong
Jinho Jeong
In-Deok Hwang
Type and activity of management are the main factors of effective operation and termination of business projects of a firm, leading to key determinants firm value. Since the type and activity of management are asymmetric information, a firm needs to design mechanism for screening and monitoring the management. Management entrenchment under asymmetric information can cause discretionary earnings management and restraint in effective management replacement. This paper examines whether credit rating plays a role as an internal control device to constrain discretionary earnings management and to facilitate expedite effective management replacement while limiting management entrenchment and private benefit acquired from discretionary earnings management. This paper shows clear evidence that credit rating controls management entrenchment for private benefits and discretionary earnings management. In turn, this evidence provides implication that credit rating provides a mechanism controlling the management¡¯s discretionary decision making and accounting reports for boosting up income numbers.