I use this quarterly data set and conduct a large sample study to examine the earnings
management patterns around debt-covenant violations. My study shows that in general
managers manipulate earnings upward in quarters leading up to a violation, but downward
in the quarter with the violation, and while the firm remains in violation. Because of the
data limitation, prior studies have not been able to make such a fine partition to understand
exactly how managers manage earnings around covenant violations. By documenting the
conflicting directions of earnings management that can occur in different quarters in the
year with a violation, my research shows that the use of yearly data to examine the earnings
management around covenant violations is problematic.