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Refinancing risk and earnings management

  • Yura Kim University of Seoul
  • Seonmi Kim Chonnam National University
  • Kyojik “Roy” Song Sungkyunkwan University
We measure a firm’s refinancing risk as the ratio of its debt maturity to asset maturity and test the relation between refinancing risk and discretionary accruals. Using US data over the period of 1988-2015, we find that firms with higher refinancing risk engage in more income-increasing accruals management, which indicates that the firms have opportunistic incentives to inflate earnings to appear financially attractive to potential creditors. The positive relation between refinancing risk and discretionary accruals is not explained by leverage or imminent debt issuance. We also document that the firm’s cash holdings attenuate the adverse effect of the refinancing risk on earnings management. Overall, our findings suggest that refinancing risk provides an important motive for accruals management.

  • Yura Kim
  • Seonmi Kim
  • Kyojik “Roy” Song
We measure a firm’s refinancing risk as the ratio of its debt maturity to asset maturity and test the relation between refinancing risk and discretionary accruals. Using US data over the period of 1988-2015, we find that firms with higher refinancing risk engage in more income-increasing accruals management, which indicates that the firms have opportunistic incentives to inflate earnings to appear financially attractive to potential creditors. The positive relation between refinancing risk and discretionary accruals is not explained by leverage or imminent debt issuance. We also document that the firm’s cash holdings attenuate the adverse effect of the refinancing risk on earnings management. Overall, our findings suggest that refinancing risk provides an important motive for accruals management.
refinancing risk; maturity matching; cash holdings; discretionary accruals; earnings management