Refinancing Pressure and Earnings Management: Evidence from Changes in Short-term Debt and Discretionary Accruals

Refinancing pressure may entice a very specific form of managerial misbehavior on the part of borrowers. Borrowers utilizing a greater amount of short term debt in one period may feel pressure to make their firms look as attractive as possible leading into the next period when refinancing may take place. In other words, potential refinancing pressure may lead managers to manipulate earnings. We examine the relation between changes in debt in current liabilities (short-term debt) and discretionary accruals as an indicator of the propensity to manage earnings. Our results show that (i) firms have higher discretionary accruals during periods of increased short-term debt, (ii) firms have higher discretionary accruals prior to the initiation of bank loan agreements, and (iii) both of these relations are influenced by a firm’s credit risk