Pricing of innate and discretionary accruals in Australian debt

Husam Aldamen · Keith Duncan

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Auditing, Earnings Management, Governance Corporate Finance and Governance Credit Risk and Financial Regulations

Abstract

Abstract This paper addresses the conflicting evidence on the role of accruals in debt pricing. We show that the two subcomponents of accruals quality, innate and discretionary accruals, both impact the debt pricing. Higher innate accruals increases cost of debt, consistent with the prior evidence ( Franciset al., 2005 ; Grayet al., 2009 ). However, we also find that higher discretionary accruals reduce the cost of debt. This contrasts with the prior evidence of a positive association between discretionary accruals and cost and debt ( Franciset al., 2005 ), and no association ( Grayet al., 2009 ). We show that noisy measurement of cost of debt reconciles these results.

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References

2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 2010Understanding earnings quality: A review of the proxies, their determinants and their consequences 2005The market pricing of accruals quality 2004Information and the Cost of Capital 2007Accounting Information, Disclosure, and the Cost of Capital 2004Costs of Equity and Earnings Attributes 2004Board characteristics, accounting report integrity, and the cost of debt 1996The pricing of discretionary accruals

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