Earnings Management, Debt Contracts and Monetary Policy
Abstract
The impact of debt contract on earnings management is analyzed from two perspectives: on the one hand, debt has an incentive and constraint effect on executives, and a certain degree of debt can restrict the behavior of earnings management. That is, enterprises can maintain high earnings quality in order to obtain low-cost financing. On the other hand, debt financing increases the interest cost of enterprises. In order to keep the profits of external reports unchanged, enterprises will have earnings management motivation in the short term to maintain the stability of stock price. Since debt financing has both a positive restraining function and a negative stimulating effect on earnings management, what kind of positive and negative effect prevails is the content of this paper. Based on the data of Chinese listed companies from 2010 to 2019, it is found that the new debt financing of listed companies significantly stimulates earnings management, especially positive accrual earnings management. However, the tightening monetary policy has a significant restraining effect on this negative effect. Under the tightening monetary policy, the stimulation of new debt on earnings management is significantly weaker than that in the loose monetary policy environment. Under the tightening policy, the stock price is not so sensitive to earnings management, so the motivation of enterprise earnings management is obviously weakened, even if there is new debt contract.
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