3.01. Real activities manipulation by firms prior to debt offerings

Autores: Mellado-Cid, C., Ngo, T.

Palabras Clave: Real activities manipulation, debt issues, earnings management

We examine real activities manipulation by firms prior to their debt issuances and how such manipulation activities affect bond yield spreads. We find that bond-issuing firms ramp up their real activities manipulation in the five quarters leading to the bond issuances.

Interestingly, we document a negative relationship between yield spread and pre-issue real activities manipulation; firms that engage in more real activities manipulation can issue debts at lower costs. Thus, bondholders fail to see through the real activities manipulation in pricing new debts. Since real activities manipulation affects firm future cash flows and subsequently its solvency capability, it is critical that bondholders have the incentives and the capability to look into real activities manipulation and a corresponding yield is applied.