Does Management Try to Influence Credit Ratings by Smoothing Earnings

Abstract

We utilize Ordered Probit Model to explore the relationships between credit ratings and earnings management for all Taiwan public holding companies from 1997 to 2002, except for the banking and insurance industries. During our study period, credit ratings changed a lot for most firms. We find the relationships between credit ratings and the accrual accounting items for earnings management. Firms with better credit ratings tend to use long-term accrual items for earnings management; on the other hand, firms with inferior credit ratings use current accrual items to manipulate earnings. We also find that if the firm tries to maintain its credit ratings level, it would use more accrual items for earnings manipulation and credit ratings. Our findings indicate that the average credit ratings of electronics manufacturing company are better than rest of our studied sample firms. This implies that electronics manufacturing firms, along with other better credit rating firms, have the tendency to focus more on long-term than short-run.