Corporate bond repurchases and earnings management

This paper investigates whether earnings management incentives are associated with gains/losses recognized when firms repurchase bonds. The research question is motivated by the inclusion of these gains/losses in firms' income, which creates the potential to use them to manage earnings. Using a sample of 778 bond repurchases from 1994 to 2011, I find that firms record larger extinguishment gains when earnings are (i) short of analysts' forecasts, or (ii) low relative to the prior year's earnings. Furthermore, the effect is more pronounced after the introduction of SFAS 145 which moved gains/losses from the extinguishment of debt from extraordinary items to operating income. In addition, the result is weaker after SFAS 159 which allowed firms to report liabilities at fair value, thus causing smaller gains to be recorded upon repurchase of debt. This study contributes to the literature on earnings management by providing evidence of real earnings management through bond repurchases and to the literature on bond buybacks by identifying accounting incentives as a determinant of the size of extinguishment gains.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2013

Author dc:creator

• Lemayian, Zawadi Rehema

Advisor dc:contributor.advisor

• Michelle Hanlon.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/82291

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/82291