Real versus Accrual-Based Earnings Management and the Issuance of Private and Public Debt

This paper examines the relationship between borrower's choice of debt financing (public versus private) and its choice of earnings management tools (accrual-based versus real activities). Based on a sample of public and private debt issuers from 1992 through 2002, I document that public debt issuers increase their accruals prior to issue then decrease their accruals subsequent to issue year while private issuers do not show any specific pattern. In addition, I find evidence that both public and private debt issuers engage in real earnings management. However, the results suggest that private debt issuers manipulate earnings via real actions more heavily than public debt issuers. Overall, the findings in this study suggest that public debt issuers prefer to manipulate earnings through income increasing accruals while private debt issuers prefer to manage earnings through real activities.