Creditor Protection and Enterprise Earnings Management —A Test Based on Bond Covenants

ABSTRACT

Excessive earnings management can significantly reduce the quality of accounting information, consequently harming the interests of investors and creditors. In the Chinese market, research on earnings management focuses primarily on corporate governance and external environmental viewpoints, with limited literature addressing debt governance. This paper centers on exploring the protective impact of bond covenants, revealing their inhibitory effect on both accrual and real earnings management through two potential mechanisms (agency conflicts and risk-taking). Furthermore, this study conducts a heterogeneous analysis from various perspectives, identifying how bond covenants influence earnings management in different ways and underscoring the moderating role played by underwriters. The findings offer theoretical insights for the development of a high-quality information disclosure system.

KEYWORDS:

• Creditor protection
• earnings management
• bond covenants
• information disclosure

JEL:

• G30
• G34

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The general project of national Social Science Planning “Research on China’s fiscal risk and financial risk’ feedback cycle’and its collaborative governance” [21BJY003]; National Natural Science Foundation of China “The impact of government debt on monetary policy —— Based on research on interest rate transmission channel” [71573155]; International Cooperation Program of Shandong University of Finance and Economics (2022); Fujian Provincial Federation of Social Sciences (Grant Number: FJ2023BF045, FJ2024B019).