Early Debt Repurchases as a Real Earnings Management Tool

Authors

Ahmad AlAhmad, Florida International UniversityFollow

Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Major/Program

Business Administration

First Advisor's Name

Maria Vulcheva

First Advisor's Committee Title

Committee Chair

Second Advisor's Name

Abhijit Barua

Second Advisor's Committee Title

Committee Member

Third Advisor's Name

Xiaochuan Huang

Third Advisor's Committee Title

Committee Member

Fourth Advisor's Name

Qiang Kang

Fourth Advisor's Committee Title

Committee Member

Keywords

debt repurchase, earnings management, debt extinguishment

Date of Defense

11-10-2022

Abstract

Recent studies have found evidence of the role of debt repurchases as a real earnings management tool (REM). Specifically, researchers found that a significant number of firms use the gain from early debt extinguishment to achieve earnings benchmarks (Barua and Kim 2016; Lemayian 2013; Levy and Shalev 2017). The purpose of this empirical study is to extend the literature on real earnings management through financing activities, exploring several additional aspects of debt repurchases in the context of earnings management. First, I examine whether interest expense reduction plays a role in firms’ ability to achieve earnings benchmarks. Second, I examine whether early debt repurchases, as an earnings management tool, are associated with firms’ future performance. Lastly, I examine the relationship between early debt repurchases and various accrual and real earnings management approaches.

My findings show a positive association between firms repurchasing debt and achieving prior-period earnings benchmarks. Furthermore, I find that firms face negative performance in period t+3 (t+2) when they repurchase debt and meet prior-period earnings benchmarks (zero earnings benchmarks). Finally, I find that debt repurchases, as an earnings management tool, are a complement to rather than a substitute for other real earnings management approaches.

This study's findings contribute to the literature on REM through financing activities by providing additional evidence on the relationship between debt repurchases and earning management. Furthermore, this study examines unexplored areas relating to debt repurchases. Mainly, the relation of debt repurchases to future firm performance and the association between debt repurchases and other earnings management approaches. Finally, the study extends the debt literature by providing additional insights into the motives and effects of early debt repurchases.

Identifier

FIDC010941

Recommended Citation

AlAhmad, Ahmad, "Early Debt Repurchases as a Real Earnings Management Tool" (2022). FIU Electronic Theses and Dissertations. 5175.
https://digitalcommons.fiu.edu/etd/5175