Earnings management prior to private debt issuance

Purpose The purpose of this paper is to evaluate the extent to which firms manage earnings prior to private debt issuance. Design/methodology/approach This is an empirical archival research paper using financial statement data and data related to private debt issuance. Findings The results indicate that, on average, firms engage in income-increasing earnings management in the period prior to a new private debt issuance. In addition, it was found that this income-increasing earnings management is limited to firms which have engaged in income-increasing earnings management to a greater extent in prior years. Originality/value The paper fills a notable void in the literature by investigating firms' earnings management activity prior to private lending agreements, and thereby provides new insights into both the relation between private debt and accounting quality, and the literature investigating the use of earnings management to avoid debt covenant violations.