Many previous literatures of debt maturity structure focus on agency problem, and they argue that firms will abate the agency problem by adjust their debt maturity structure. In our research, we focus on the asymmetric information between insider and outsider. We find that firms with aggressive earnings management will choose to issue more long-term debts. In order to raise enough fund more easily, firms will tend to conceal their true value and take earnings management. For avoid the outside monitors, firms with aggressive earnings management will have more incentive to issue debts with longer maturity. Furthermore, firms with aggressive earnings management issue long-term debt could prevent the higher cost of short-term debt issues if the real value of firms is revealed. Therefore, we can see that the higher the level of aggressive earnings management is, the higher proportion of the long-term debt in their capital structure is.
However, after outsiders realize the firms’ true value, they will lose their confidence in firms’ performance. Thus, in our study, we can see that the five-year long-term stock performances of these firms with aggressive earnings management after issuing debts are negative as our prediction.
To sum up, from our empirical results, the behavior of earnings management will affect the choice of debt maturity structure. Firms take aggressive earnings management will choose to have more long-term debt in their capital structure afterwards. In addition, these firms with aggressive earnings management will face poor long-term stock return performance after issuing debts because investors get the real information about firms’ performance.
References
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Journal of Finance 50, 609-631.
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“Debt Maturity, Risk, and Asymmetric Information,” Journal of Finance 60, 2895-2923.
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Journal of Finance 41, 19-37.
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Journal of Finance 51, 1809-1833.
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Economics 5, 147-175.
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Journal of Financial Economics 15, 3-29.
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Table Ⅰ
ⅠⅠⅠDistribution of Sample
The sample contains 222 firms which issue debts during the period from 1981 to 2002. The sample firms must have sufficient COMPUSTAT and CRSP data. Panel A reports the time distribution of sample firms, and Panel B reports the SIC code distribution of sample firms.
Panel A. Time Distribution
Year Frequency Percentage (%)
1981 15 6.76
1982 29 13.06
1983 23 10.36
1984 13 5.86
1985 23 10.36
1986 27 12.16
1987 10 4.5
1988 8 3.6
1989 7 3.15
1990 3 1.35
1991 12 5.41
1992 12 5.41
1993 15 6.76
1994 3 1.35
1995 7 3.15
1996 10 4.5
1998 1 0.45
1999 1 0.45
2001 2 0.9
2002 1 0.45
Total 222 100.00
Table Ⅰ
ⅠⅠ (Continued) ⅠPanel B. SIC Distribution
Industry Two-digit SIC Codes Frequency percentage(%)
Mining 10,13 26 11.71
Food Products 20 17 7.66
Paper and Paper Products 24,26,27 22 9.91
Chemical Products 28 22 9.91
Manufacturing 29,30,32,33,34 25 11.25
Computer Hardware and Software 35 12 5.41
Electronic Equipment 36 6 2.7
Scientific Instruments 38 3 1.35
Transportation 37,39,40,44,45 21 9.45
Communications 48 4 1.8
Electric and Gas Services 49 21 9.46
Wholesale Trade 50,51 4 1.8
Retail Trade 53,54,57,58,59 18 8.1
Services 70,73,75,78,80,87,89 15 6.75
All Others 22,23 6 2.7
Total 222 100.00
28 Table Ⅱ
Ⅱ Ⅱ Ⅱ
Summary of Descriptive Statistics
The sample contains 222 firms which issue debts during the period from 1981 to 2002. Panel A shows the descriptive statistics of the debt maturity structure and discretionary current accruals (DCA). Panel B shows the descriptive statistics of sample of all other control variables. The M/B ratio is measured ad the ratio of market value of firm’s assets to the book value of assets. Firm Size is measured as the market value of total assets, and the market value of total assets is the book value of assets plus the market value of equity minus the book value of equity. Abnormal Earnings is measured as earnings per share in year t+1 minus earnings per share in year t, divided by the year t share price. Term Structure is the difference between the month-end yield of six-month T-bill and the month-end yield of ten-year government bonds. Asset Maturity is measured as the value-weighted average of the maturity of current assets and gross property, plant and equipment as (2.3.5). Tax Rate is measured as income tax expenses divided by pretax income. Leverage is measured as the ratio of total debt to market value of assets. Fixed Asset Ratio is measured as PPENT divided by book value of total assets. Profitability is measured as operating income before depreciation divided by book value of total assets.
Panel A. Descriptive statistics of DCA and DEBT3
DCA (%) Debt Maturity Structure (%)
Observations Mean Median Standard Dev. Mean Median Standard Dev.
Trisection 1 (DCA>2.00%) 74 11.7022 5.5225 22.0375 82.2734 85.8308 14.1760
Trisection 2 (-0.95%<DCA<2.00%) 74 0.4072 0.3634 0.7950 83.7569 87.2820 10.6760
Trisection 3 (DCA<-0.95%) 74 -4.7657 -2.6558 6.4421 79.6086 82.6173 14.1050
Total 222 2.4479 0.3634 14.8940 81.8796 84.6150 13.1417
29
Table
Ⅱ Ⅱ Ⅱ Ⅱ
(Continued)Panel B. Descriptive of independent variables
Variable Observations Mean Standard Dev. 25% Percentile Median 75% percentile
M/B 222 1.2860 0.4800 1.0156 1.1585 1.3911
Log of Firm Value 222 7.8153 1.6567 6.7247 7.9339 8.8901
Abnormal Earnings (%) 222 -0.0838 13.2602 -2.4 0.5657 2.7346
Term Structure (%) 222 2.1146 0.8763 1.56 2.205 2.66
Asset Maturity 222 15.2810 12.1241 7.1489 13.1728 20.5675
Tax Rate (%) 222 33.7974 78.9796 30.3492 37.8493 44.5231
Leverage (%) 222 26.6558 13.8767 17.8830 22.8819 34.1632
Fixed Assets Ratio 222 0.5027 0.2204 0.3359 0.5072 0.6932
Profitability 222 0.1518 0.0658 0.1099 0.1495 0.1888
30 Table
Ⅲ Ⅲ Ⅲ Ⅲ
Pearson CorrelationsGrowth Firm Size Abnormal Term Asset Tax Rate DCA Leverage Fixed Assets Profitability
Option Earnings Structure Maturity Ratio
Growth 1 0.06893 -0.00805 -0.19875 -0.08216 0.06384 0.03106 -0.37982 0.04648 0.37455
Option (0.3066) (0.9050) (0.0029)* (0.2227) (0.3437) (0.6453) (<.0001)* (0.4908) (<.0001)*
Firm Size 0.06893 1 0.11552 -0.11062 0.15636 0.17543 -0.15263 -0.23049 0.18207 0.19229
(0.3066) (0.0859) (0.1002) (0.0198) (0.0088)* (0.0229)* (0.0005)* (0.0065)* (0.0040)*
Abnormal -0.00805 0.11552 1 0.08182 0.13407 -0.00178 -0.00723 0.10431 0.1704 -0.13243
Earnings (0.9050) (0.0859) (0.2247) (0.0460)* (0.9789) (0.9147) (0.1212) (0.0110)* (0.0488)*
Term -0.19875 -0.11062 0.08182 1 0.01966 -0.06574 0.02305 0.06663 -0.03655 -0.05068
Structure (0.0029)* (0.1002) (0.2247) (0.7708) (0.3295) (0.7326) (0.3230) (0.5880) (0.4524)
Asset -0.08216 0.15636 0.13407 0.01966 1 0.0132 -0.14789 0.06918 0.73718 -0.1015
Maturity (0.2227) (0.0198)* (0.0460)* (0.7708) (0.8449) (0.0276)* (0.3048) (<.0001)* (0.1316)
Tax Rate 0.06384 0.17543 -0.00178 -0.06574 0.0132 1 -0.05646 -0.1769 0.04255 0.09436
(0.3437) (0.0088)* (0.9789) (0.3295) (0.8449) (0.4025) (0.0082)* (0.5283) (0.1612)
DCA 0.03106 -0.15263 -0.00723 0.02305 -0.14789 -0.05646 1 -0.0379 -0.22709 -0.00541
(0.6453) (0.0229)* (0.9147) (0.7326) (0.0276)* (0.4025) (0.5743) (0.0007)* (0.9362)
Leverage -0.37982 -0.23049 0.10431 0.06663 0.06918 -0.1769 -0.0379 1 0.00301 -0.42468
(<.0001)* (0.0005)* (0.1212) (0.3230) (0.3048) (0.0082)* (0.5743) (0.9644) (<.0001)*
Fixed 0.04648 0.18207 0.1704 -0.03655 0.73718 0.04255 -0.22709 0.00301 1 0.13326
Assets Ratio (0.4908) (0.0065)* (0.0110)* (0.5880) (<.0001)* (0.5283) (0.0007)* (0.9644) (0.0474)*
Profitability 0.37455 0.19229 -0.13243 -0.05068 -0.1015 0.09436 -0.00541 -0.42468 0.13326 1
(<.0001)* (0.0040)* (0.0488)* (0.4524) (0.1316) (0.1612) (0.9362) (<.0001)* (0.0474)*
Table Ⅳ
ⅣⅣⅣOrdinary Least Squares Regression Predicting Debt Maturity Structure
The table reports the OLS results of our sample. The dependent variable of this regression is DEBT3 and is regressed by DCA. Other control variables include market-to-book ratio, natural logarithm of firm value, abnormal return, term structure, regulation dummy assets maturity, and tax rate. White’s (1980) heteroskedasticity consistent t-statistics are in parentheses. ***, **, * indicate significant at the 1%, 5%, and 10% levels each.
Dependent Variable: Debt3
Variables Coefficient Standard Error
Intercept 59.5160 13.9169
(4.2765)***
DCA 0.0819 0.0353
(2.3211)**
Growth Option 3.5954 1.4903
(2.4126)**
Firm Size 6.3717 3.5166
(1.811909)*
(Firm Size)2 -0.4782 0.2236
(-2.1385)**
Abnormal Earnings 0.0254 0.0881
(0.288341)
Term Structure -0.9241 1.0037
(-0.9207)
Asset Maturity 0.0118 0.0744
(0.1589)
Regulation Dummy -4.4591 5.1510
(-0.8657)
Tax Rate 0.0045 0.0078
(0.5702)
R2 0.0583
Adj-R2 0.0183
Observation 222
Table Ⅴ
ⅤⅤⅤTwo-Stage Least Squares Regression Predicting Debt Maturity
The table reports the 2SLS results of our sample firms. In panel A, the dependent variable of second-stage regression is DEBT3 and is regressed by discretionary current accruals (DCA). The DCA is the predicted DCA estimated in the first-stage regression. The Leverage is the predicted Leverage which is estimated from the first-stage regression. Panel B reports the results of the second-stage regression which dependent variable is Leverage. The DEBT3 is the predicted DEBT3 which is estimated from the first-stage regression. White’s (1980) heteroskedasticity consistent t-statistics are in parentheses. ***, **, * indicate the significant level of 1%, 5%, and 10%.
Panel A. Dependent Variable: Debt3
Variables Predicted Sign Coefficient Standard Error
Intercept / 58.8360 21.6546
(2.72)***
DCA ＋ 0.0820 0.0315
(2.60)***
Growth Option － 3.8629 3.3653
(1.15)
Firm Size ＋ 6.2419 3.6491
(1.71)*
(Firm Size)2 － -0.4642 0.2240
(-2.07)**
Abnormal Earnings － 0.0222 0.0936
(0.24)
Term Structure ＋ -0.9204 1.0154
(-0.91)
Regulation Dummy ＋ -4.4717 5.1017
(-0.88)
Asset Maturity ＋ 0.0106 0.0755
(0.14)
Leverage ＋ 0.0233 0.2544
(0.09)
R-Square 0.0523
Adjusted R2 0.0121
Observation 222
Table
ⅤⅤⅤⅤ(Continued)
Panel B. Dependent Variable: Leverage
Variables Coefficient Standard Error
Intercept 75.1421 26.7867
(2.81)***
Debt3 -0.2314 0.2981
(-0.78)
Growth Option -6.5149 2.7409
(-2.38)**
Firm Size -1.6262 0.5402
(-3.01)***
Fixed Assets Ratio 2.8484 4.4647
(0.6380)
Profitability -64.7305 10.9991
(-5.8851)***
Abnormal Earnings 0.0848 0.0663
(1.28)
Regulation Dummy -2.1533 2.7994
(-0.77)
R-Square 0.2761
Adjusted R2 0.2524
Observation 222
Table Ⅵ
ⅥⅥⅥLong-Term Stock Returns Performance of Buy-and-Hold Abnormal Returns
This table reports the 5-year long-term stock return performance which is measured by the method of buy-and-hold abnormal returns (BHAR). Panel A presents the equally-weighted abnormal returns. Panel B presents the value-weighted abnormal returns. Panel C presents the matching-firm adjusted abnormal returns where the matching firms are chosen on the basis of the size and the book-to-market ratio. ***, **, * indicate the significant levels at 1%, 5%, and 10%.Panel A. BHAR (Equally-Weighted) Equally-Weighted
Holding Period (Year) 1 2 3 4 5
Whole Sample
Mean Abnormal Return -2.32% 2.96% 2.06% 2.36% 15.33%
Cross-sectional t-stat -0.606 0.549 0.328 0.303 1.668*
Skewness-adjusted t-stat -0.584 0.568 0.332 0.306 1.711*
Aggressive Firms
Mean Abnormal Return -9.95% -8.43% -17.23% -17.81% -2.02%
Cross-sectional t-stat -1.188 -0.724 -1.775* -1.556 -0.147 Skewness-adjusted t-stat -0.986 -0.66 -1.631 -1.48 -0.147
Conservative Firms
Mean Abnormal Return 3.50% 7.69% 4.86% 3.30% 14.93%
Cross-sectional t-stat 0.603 1.006 0.473 0.256 0.87
Skewness-adjusted t-stat 0.616 1.024 0.479 0.256 0.888
Panel B. BHAR (Value-Weighted)
Value-Weighted
Holding Period (Year) 1 2 3 4 5
Whole Sample
Mean Abnormal Return 0.33% 1.18% -7.73% -15.97% -10.62%
Cross-sectional t-stat 0.088 0.225 -1.216 -2.081** -1.175 Skewness-adjusted t-stat 0.089 0.229 -1.173 -1.975** -1.153
Aggressive Firms
Mean Abnormal Return -8.99% -10.67% -27.80% -38.20% -32.25%
Cross-sectional t-stat -1.104 -0.945 -2.952*** -3.416*** -2.492***
Skewness-adjusted t-stat -0.924 -0.834 -2.559*** -3.065*** -2.378**
Conservative Firms
Mean Abnormal Return 5.56% 4.90% -5.47% -12.58% -6.41%
Cross-sectional t-stat 0.955 0.688 -0.523 -0.984 -0.378 Skewness-adjusted t-stat 0.992 0.712 -0.518 -0.978 -0.375
Table Ⅵ
ⅥⅥ (Continued) ⅥPanel C. BHAR (Matching firm)
Matching Firms
Holding Period (Year) 1 2 3 4 5
Whole Sample
Mean Abnormal Return 0.49% -1.09% -1.76% -5.08% -6.71%
Cross-sectional t-stat 0.224 -0.317 -0.473 -1.28 -1.504 Skewness-adjusted t-stat 0.227 -0.309 -0.461 -1.2 -1.422
Aggressive Firms
Mean Abnormal Return -5.76% -4.41% -8.58% -11.55% -15.95%
Cross-sectional t-stat -1.54 -0.583 -1.524 -1.780* -2.488***
Skewness-adjusted t-stat -1.274 -0.529 -1.404 -1.556 -2.345**
Conservative Firms
Mean Abnormal Return 4.97% 0.19% -0.57% -2.33% -2.48%
Cross-sectional t-stat 1.393 0.043 -0.098 -0.398 -0.312 Skewness-adjusted t-stat 1.441 0.043 -0.097 -0.396 -0.309
36 Table Ⅶ
Ⅶ Ⅶ Ⅶ
Long-Term Stock Returns Performance of Fama and French Three-Factor Model Abnormal Returns
The table reports the 5-year long-term stock returns performance which is measured by Fama and French three-factor model. Panel A presents the equally-weighted abnormal returns. Panel B presents the value-weighted abnormal returns. The regression coefficients are estimated using weighted least squares to correct for heteroskedasticity. ***,
**, * indicate the significant levels at 1%, 5%, and 10%.
Panel A. Fama and French Three-Factor Model (Equally-Weighted)
Equally-Weighted
Aggressive Conservative
Holding Period (Year) α β
s h R2α β
s h R21 -0.0101 1.1524 0.6759 -0.0014 0.4676 -0.0031 1.3001 0.3832 0.4012 0.4089 (-2.03)** ( 9.90)*** ( 3.30)*** (-0.01) (-0.61) (10.23)*** ( 2.06)** ( 1.98)**
2 -0.0086 1.2474 0.6349 0.2267 0.6465 -0.0016 1.3201 0.3418 0.3445 0.5638 (-2.69)*** (17.07)*** ( 4.75)*** (1.64) (-0.48) (15.73)*** ( 2.54)*** ( 2.46)**
3 -0.0074 1.1951 0.6398 0.2109 0.6212 -0.0038 1.2938 0.3609 0.3447 0.6331 (-2.52)*** (16.76)*** ( 5.10)*** (1.61) (-1.42) (18.91)*** ( 3.30)*** ( 3.00)***
4 -0.006 1.1692 0.7269 0.2331 0.6486 -0.0045 1.2941 0.2631 0.3996 0.6369 (-2.30)** (18.24)*** ( 6.57)*** ( 1.97)** (-1.85)* (20.56)*** ( 2.92)*** ( 3.78)***
5 -0.0039 1.2007 0.5968 0.3116 0.6728 -0.0044 1.3019 0.3332 0.4581 0.6687
(-1.63) (20.78)*** ( 6.09)*** ( 2.85)*** (-1.96)** (22.56)*** ( 4.04)*** ( 4.79)***
37
Table Ⅶ
Ⅶ Ⅶ (Continued) Ⅶ
Panel B. Fama and French Three-Factor Model (Value-Weighted)