Asymmetry in Earnings Management Surrounding Targeted Ratings
This study investigates asymmetric incentives in ﬁrms managing earnings in an attempt to achieve a target ﬁnancial strength rating. We ﬁnd empirical evidence that ﬁrms with an actual rating below their target rating use income-increasing earnings management. However, we ﬁnd no evidence that ﬁrms above their target rating manage earnings. Our ﬁndings are robust to a variety of alternative deﬁnitions of target rating. Notably, we examine a subset of ﬁrms with an exogenously determined target rating and ﬁnd consistent results. These ﬁndings indicate that ﬁrms have incentives to reach a target rating if they are rated below their target, but not above their target.
Eckles, D. L. (2021, March 9). Asymmetry in earnings management surrounding targeted ratings [Video podcast]. Retrieved from https://commons.ln.edu.hk/chair-professor-webinar/2/