Accruals and Real Earnings Management: Testing the Debt Covenant Hypothesis

Umar Butt
Trevor Chamberlain
Sudipto Sarkar

Document Type

Article

Source of Publication

International Journal of Accounting and Finance

Publication Date

1-1-2016

Abstract

This paper examines earnings management activities around debt covenant violations. We focus on accruals management and real activities manipulation behavior of managers in the quarters around the covenant violation. We expect covenant restrictions to influence these activities in the quarters surrounding and the quarter of the violation. The evidence is consistent with managers manipulating earnings using accrual-based and real earnings management activities and provides evidence for the debt covenant hypothesis. Cross-sectional analyses reveal that managers appear to manipulate accruals in successive quarters in order to increase reported earnings. The evidence on the use of real activities suggests that while managers increase reported earnings in the violation quarter, they have limited discretion over the use of real earnings management techniques in the quarters surrounding the violation.

ISSN

1752-8224

Publisher

Inderscience Publishers

Volume

6

First Page

167

Disciplines

Business

Indexed in Scopus

no

Open Access

no

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