Question

Do firms manage earnings to influence credit ratings

Answer 1

Answer:

Credit ratings agencies predict a firm's credit ratings 1 year in advance. Thus, a firm is unlikely to engage in earnings management in period t-1 to influence credit ratings in period t, the credit watch period because a firm is likely under more scrutiny from credit rating agencies.

Answer 2

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Issuers' incentives to manage earnings also depend on the perceived effectiveness of such management, which, in turn, depends on whether rating agencies are influenced by EM. ... Firms on positive credit watch could also have incentives to manage earnings to obtain an upgrade.