Under agency theory and assumptions of earnings management, the objective is to study the relationship between earnings management (EM) and the cost of debt (Ki) of Brazilian publicly held companies in the period from 1996 to 2007. The assumptions raised through the literature are that targeting better contractual terms, like cost of debt, current or past cost, motivates the company to manage the current result so as to obtain better conditions for current or future cost. Thus, companies, intentionally, would seek to manage their results, motivated by the cost of debt. However, theoretical support for the relationship between these variables would be unidirectional, with EM influencing the cost of debt, supporting the second hypothesis. To reach the objective, the work used the EM model for the discretionary accruals proposed by Kang and Sivaramakrishnan (1995) as a proxy. The tests were based on Mann-Whitney's, nonparametric U test, followed by the Hausman specification test for simultaneity analysis, ending with regression with panel data arranged with Newey-West correction. Tests showed the average for a positive relationship between EM and Ki, but the test did not indicate that there is a simultaneous inter-relationship between variables. The results of the panel regression indicates that Ki does not influence EM, but there is a positive relationship between them, in which the higher the EM, the higher the Ki.
Earnings Management; Discretionary Accruals; Cost of Debt
