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External demands for earnings management: The association between earnings variability and bond risk premia

Robinson, Thomas Richard
http://rave.ohiolink.edu/etdc/view?acc_num=case1056638529

Abstract Details

1993, Doctor of Philosophy, Case Western Reserve University, Management.
This dissertation examines the relationships among earnings variability, earnings management and bond risk premia. While previous empirical accounting research has focused on the existence of earnings management which smooths earnings variability, and managerial incentives to smooth earnings, this dissertation examines a shareholder incentive for managers to smooth the variability of earnings. Recent analytical research posits that shareholders can benefit from reductions in earnings variability by a reduced risk premium, which leads to a higher price on bond issues. This dissertation examines bond pricing models which show that bondholders do prefer a lower variability of earnings, ceteris paribus. The lower variability reduces the bondholders perception of the risk of default on a bond, which in turn lowers the risk premium required by bondholders. This dissertation examines the relationships of earnings variability, earnings management and bond risk premia for a sample of 472 bonds for 127 companies. The dissertation finds that the 127 sample firms tended to reduce earnings variability 16.9%, on average, through the use of discretionary accruals. Results suggest, however, that bondholders see through earnings management and examine the underlying earnings var iability (before the use of discretionary accruals) and cash flow variability in assessing a bond's required risk premium. The study also compares separate individual and institutional bond markets and finds that there is no difference in the relationships among earnings variability, earnings management and risk premia between the two markets. There are three major contributions to this study: (1) it develops a quantitative measure of earnings variability management over many years; (2) it empirically examines a shareholder incentive for earnings variability management posited in the accounting literature and presents evidence that is inconsistent with such an incentive; (3) it examines two separate and distinct bond markets for individual and institutional markets and finds that there is no evidence of a difference in the risk premium determination between the two. The results imply that the current level of managerial discretion does not permit managers to shift wealth from bondholders to shareholders through smoothing behavior and, therefore, restricting managerial discretion does not appear necessary. However, results are also consistent with discretionary accruals having no information content in the bond markets and that cash flow variability may be sufficient for bond pricing decisions.
Bricker, Robert Bricker, Robert (Advisor)
266 p.
External demands; earnings management; earnings variability; bond risk premia

Recommended Citations

Citations

  • Robinson, T. R. (1993). External demands for earnings management: The association between earnings variability and bond risk premia [Doctoral dissertation, Case Western Reserve University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=case1056638529

    APA Style (7th edition)

  • Robinson, Thomas. External demands for earnings management: The association between earnings variability and bond risk premia. 1993. Case Western Reserve University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=case1056638529.

    MLA Style (8th edition)

  • Robinson, Thomas. "External demands for earnings management: The association between earnings variability and bond risk premia." Doctoral dissertation, Case Western Reserve University, 1993. http://rave.ohiolink.edu/etdc/view?acc_num=case1056638529

    Chicago Manual of Style (17th edition)

case1056638529
804
© 1993, all rights reserved.
This open access ETD is published by Case Western Reserve University School of Graduate Studies and OhioLINK.