Author(s)

Zhenjia Liu ¹

Affiliation(s)

¹ School of Accounting and Finance, Tan Kah Kee College, Xiamen University, Xiamen, Fujian, China

Corresponding Author

Zhenjia Liu

ABSTRACT

Previous literature shows mixed evidence on the effect of earnings management on the cost of debt. This study investigates the impact of real earnings management on the cost of debt and develop regression model, evaluated it for accuracy. Using a sample of Chinese listed banks during the period 2011–2018, we show that real earnings management has a negative relation with the cost of debt (only total loan loss provisions and increase loan loss provisions have a significantly relationship with cost of debt). Particularly, the banks have adopted discretionary loan loss provisions to earnings management to increase their adjusted income (i.e., decrease loan loss provisions) enjoy a lower interest costs than the banks have adopted discretionary loan loss provisions to earnings management to decrease their adjusted income (i.e., increase loan loss provisions). In addition, we have also developed regression model, evaluated it for accuracy used criteria based on the mean squared error (MSE), Root MSE (RMSE), mean absolute error (MAE), median AE, Mean absolute percentage error (MAPE), Median APE, root mean squared percentage error (RMSPE), and the root median squared percentage error (RMSPE) and showed that earnings management through decrease loan loss provisions have a highest ability to explain the model (these values performed the lowest) in Chinese listed banks. 

KEYWORDS

banks, loan loss provisions, real activities earnings management, cost of debt

CITE THIS PAPER

Zhenjia Liu, Relationship between Real Earnings Management with Cost of Debt: An Advanced Study of Chinese Listed Banks. Financial Engineering and Risk Management (2022) Vol. 5: 57-68. DOI: http://dx.doi.org/10.23977/ferm.2022.050210.

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