Effects of earnings management on bank cost of debt

Abstract

Abstract This study investigates how earnings management influences credit ratings, and thus the cost of debt, using bank data from 85 countries. Using cross‐country data also facilitates the investigation of how information asymmetry affects the influence of earnings management on ratings. The results indicate that raters downgrade ratings when they perceive earnings management, after controlling for other potential determinants of bank credit ratings, implying that earnings management increases borrowing costs. The negative effect of earnings management is mitigated for banks in countries with more extensive and effective banking regulations owing to lower information asymmetry, but aggravated in counties with less robust banking regulations.

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