Short-Term Debt Maturity, Monitoring and Accruals-Based Earnings Management

When we examine all firms in the sample we find that short-term debt is positively associated with earnings management consistent with some prior studies and the debt hypothesis. However, when we focus on high creditworthy (investment grade) firms we find a negative relation between short-term debt and earnings management, proxied by discretionary accruals, consistent with the debt monitoring hypothesis. We also find that among high creditworthy firms, the relation between short term debt and discretionary accruals is stronger in the lesser creditworthy firms, consistent with Myers (1997) argument that lenders of short term debt provide monitoring over management