Bond Ratings Downgrades and Managers' Accounting Choices

This paper studies accruals operating cash flow and writedowns in 73 firms whose bond ratings were downgraded by Moody's or Samp;P for reasons relating to declining earnings prospects. We find that managers' accounting choices primarily reflect their firms' financial difficulties rather than attempts to inflate income. In the year of the bond rating downgrade firms show significantly more negative accruals but higher average operating cash flows than a comparable set of firms acting as the control sample. Our findings provide support that accruals and writedowns of financially troubled firms improve earnings' ability to measure firm performance