CEO inside debt and earnings management

Sandip Dhole, Hariom Manchiraju, Inho Suk

Research output: Contribution to journalArticleResearchpeer-review

11 Citations (Scopus)

Abstract

This study examines the impact of CEO inside debt on earnings management. Theory predicts that CEOs with higher inside debt holdings adopt less risky corporate policies and choose investment policies that result in less volatile earnings. Under such circumstances, CEOs would face weaker demand for income smoothing. Consistent with these expectations, our results reveal that CEO inside debt is negatively associated with both accrualand real activities-based earnings management. We also find that firms with higher levels of CEO inside debt are less likely to meet or slightly beat analysts' earnings forecasts. Furthermore, the capital market response to positive earnings surprises is greater when CEOs hold higher positions of inside debt. Overall, our findings suggest that inside debt counteracts CEOs' incentives to smooth earnings through earnings management and investors understand the deterrence effect of inside debt on earnings management.

Original languageEnglish
Pages (from-to)515-550
Number of pages36
JournalJournal of Accounting, Auditing and Finance
Volume31
Issue number4
DOIs
Publication statusPublished - 2016
Externally publishedYes

Keywords

  • Agency theory
  • CEO inside debt
  • Earnings management
  • Earnings smoothing
  • Executive compensation

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