Earnings Management in Manager-owned Firms: Are Lenders Fooled?

Research output: Contribution to conferencePaperResearch

Abstract

This paper explores the causes and cost-of-debt consequences of earnings management in manager-owned firms. We identify a unique institutional setting in which the owner-manager has discretion to shift income from salary to dividends at almost no direct cost due to approximate tax neutrality between the two income streams, and hence increase reported earnings. We term this behavior salarydividend earnings management (SDEM, hereafter). We find that the use of SDEM is associated with the magnitude of debt, and that SDEM firms obtain cost of debt benefits. Both of these relations are stronger in magnitude around the zero earnings benchmark, but not around the last year’s earnings benchmark. The findings extend the earnings management and commercial lending literature by documenting opportunistic behavior and caused effects in firms where manager-shareholder agency conflicts are absent.
Original languageEnglish
Publication date2018
Number of pages51
Publication statusPublished - 2018
EventNordic Accounting Conference 2018 - Copenhagen Business School. CBS, Frederiksberg, Denmark
Duration: 15 Nov 201816 Nov 2018
https://conference.cbs.dk/public/conferences/16/schedConfs/70/program-en_US.pdf

Conference

ConferenceNordic Accounting Conference 2018
LocationCopenhagen Business School. CBS
CountryDenmark
CityFrederiksberg
Period15/11/201816/11/2018
Internet address

Bibliographical note

CBS Library does not have access to the material

Keywords

  • Earnings management
  • Commercial lending
  • Owner-managed firms
  • Private firms
  • Cost of debt

Cite this

Jensen, M., Christoffersen, J., & Plenborg, T. (2018). Earnings Management in Manager-owned Firms: Are Lenders Fooled?. Paper presented at Nordic Accounting Conference 2018, Frederiksberg, Denmark.
Jensen, Morten ; Christoffersen, Jeppe ; Plenborg, Thomas. / Earnings Management in Manager-owned Firms : Are Lenders Fooled?. Paper presented at Nordic Accounting Conference 2018, Frederiksberg, Denmark.51 p.
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abstract = "This paper explores the causes and cost-of-debt consequences of earnings management in manager-owned firms. We identify a unique institutional setting in which the owner-manager has discretion to shift income from salary to dividends at almost no direct cost due to approximate tax neutrality between the two income streams, and hence increase reported earnings. We term this behavior salarydividend earnings management (SDEM, hereafter). We find that the use of SDEM is associated with the magnitude of debt, and that SDEM firms obtain cost of debt benefits. Both of these relations are stronger in magnitude around the zero earnings benchmark, but not around the last year’s earnings benchmark. The findings extend the earnings management and commercial lending literature by documenting opportunistic behavior and caused effects in firms where manager-shareholder agency conflicts are absent.",
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Jensen, M, Christoffersen, J & Plenborg, T 2018, 'Earnings Management in Manager-owned Firms: Are Lenders Fooled?' Paper presented at, Frederiksberg, Denmark, 15/11/2018 - 16/11/2018, .

Earnings Management in Manager-owned Firms : Are Lenders Fooled? / Jensen, Morten; Christoffersen, Jeppe; Plenborg, Thomas.

2018. Paper presented at Nordic Accounting Conference 2018, Frederiksberg, Denmark.

Research output: Contribution to conferencePaperResearch

TY - CONF

T1 - Earnings Management in Manager-owned Firms

T2 - Are Lenders Fooled?

AU - Jensen, Morten

AU - Christoffersen, Jeppe

AU - Plenborg, Thomas

N1 - CBS Library does not have access to the material

PY - 2018

Y1 - 2018

N2 - This paper explores the causes and cost-of-debt consequences of earnings management in manager-owned firms. We identify a unique institutional setting in which the owner-manager has discretion to shift income from salary to dividends at almost no direct cost due to approximate tax neutrality between the two income streams, and hence increase reported earnings. We term this behavior salarydividend earnings management (SDEM, hereafter). We find that the use of SDEM is associated with the magnitude of debt, and that SDEM firms obtain cost of debt benefits. Both of these relations are stronger in magnitude around the zero earnings benchmark, but not around the last year’s earnings benchmark. The findings extend the earnings management and commercial lending literature by documenting opportunistic behavior and caused effects in firms where manager-shareholder agency conflicts are absent.

AB - This paper explores the causes and cost-of-debt consequences of earnings management in manager-owned firms. We identify a unique institutional setting in which the owner-manager has discretion to shift income from salary to dividends at almost no direct cost due to approximate tax neutrality between the two income streams, and hence increase reported earnings. We term this behavior salarydividend earnings management (SDEM, hereafter). We find that the use of SDEM is associated with the magnitude of debt, and that SDEM firms obtain cost of debt benefits. Both of these relations are stronger in magnitude around the zero earnings benchmark, but not around the last year’s earnings benchmark. The findings extend the earnings management and commercial lending literature by documenting opportunistic behavior and caused effects in firms where manager-shareholder agency conflicts are absent.

KW - Earnings management

KW - Commercial lending

KW - Owner-managed firms

KW - Private firms

KW - Cost of debt

KW - Earnings management

KW - Commercial lending

KW - Owner-managed firms

KW - Private firms

KW - Cost of debt

M3 - Paper

ER -

Jensen M, Christoffersen J, Plenborg T. Earnings Management in Manager-owned Firms: Are Lenders Fooled?. 2018. Paper presented at Nordic Accounting Conference 2018, Frederiksberg, Denmark.