Abstract

Using a sample of listed companies in China from 2011 to 2013, this chapter mainly illustrates from the perspective of creditors, to explore the effect of real earnings management (REM) behavior on the cost of debt. This paper finds that when controlling the accrual earnings management, company size, and other relevant factors, REM is positively related with the company’s cost of debt. The research results show that banks can recognize REM, and banks and other creditors perceive REM to be a credit risk increasing factor. It also suggests the effectiveness of the creditor supervision. Furthermore, the subsample-tests show that banks are easier to identify production and expense manipulation than sales manipulation.

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