Do Syndicated Loan Borrowers Tradeoff Real Activities Manipulation with Accrual-Based Earnings Management?

Following Cohen and Zarowin (2010), this study examines management's choices between alternative earnings management mechanisms applied to a specific corporate finance event. Specifically, this study examines the tradeoff between accrual-based earnings management (AEM) and real activities manipulation (RAM) prior to syndicated loan origination. This study also tests whether lenders' monitoring mechanisms result in any differential effects on future earnings management activities. The syndicated loan market bridges the private and public fixed-income markets and provides a unique setting to test the choices of earnings management mechanisms. Using a propensity score matched sample of syndicated versus bilateral loans originated between 1989 and 2005, we predict and find empirical evidence that while syndicated loan borrowers are likely to manipulate accounting earnings prior to the origination of syndicated loans, they draw more heavily on AEM than on RAM. Further analysis suggests that syndicate lenders' monitoring mechanisms — such as reputable lenders, number of syndication, loan size and loan maturity — are significantly associated with the future changes of AEM activities; the effect on the future changes of RAM activities is less significant