Refinancing Risk, Earnings Management, and Stock Return

Using US data over the period of 1988-2021, we find that firms with higher refinancing risk engage in more income-increasing accruals management, which indicates that the firms have opportunistic incentives to inflate earnings to appear financially attractive. We also document that the positive relation between refinancing risk and discretionary accruals is not explained by leverage, and that the firm’s cash holdings attenuate the adverse effect of the refinancing risk on earnings management. In addition, we find that the income-increasing accruals management of the firms with high refinancing risk decreases one-year-ahead stock returns. Overall, our findings suggest that the effect of a firm’s earnings management facing refinancing risk is temporary