The purpose of this study is to test relation of credit rating and earnings management.
The firms have the incentive to make credit rating better with earnings management. But, if earnings management is considered in credit rating, earnings management will negatively be related with credit rating.
This study used credit rating for firms instead of credit rating for issuing a debt and considered discretionary accruals as a means of earnings management. Test period is from 2002 to 2010. Samples are 3,612 year-firms from public, manufacturing firms.
The empirical results showed that there was a negative relation between discretionary accruals and credit rating level. This means that though the firms have the incentive to improve credit rating through earnings management, earnings management have an negative effect on credit rating. Also, there was a negative relation between discretionary accruals and credit rating change. This means that earnings management have an negative effect on credit rating change.
The empirical results imply that the firms manage earnings with discretionary accruals for the purpose of improving credit rating, but that credit rating negatively reflect the incentive.