Asymmetry in Earnings Management Surrounding Targeted Ratings

This study investigates asymmetric incentives in firms managing earnings in an attempt to achieve a target financial strength rating. We find empirical evidence that firms with an actual rating below their target rating use income-increasing earnings management. However, we find no evidence that firms above their target rating manage earnings. Our findings are robust to a variety of alternative definitions of target rating. Notably, we examine a subset of firms with an exogenously determined target rating and find consistent results. These findings indicate that firms have incentives to reach a target rating if they are rated below their target, but not above their target. Highlight: https://www.ln.edu.hk/sgs/chair-professor-research-sharing-webinar-02-highlight