We investigate whether issuers on negative credit watch manage earnings upward and whether suchearnings management favorably influences the watch resolution. We find that rating, industry, and performancematched discretionary accruals reported during negative watch are significantly higher than their respective pre- andpost-watch levels, after controlling for accrual reversal. Consistent with its opportunistic nature, we find that accrualmanagement increases with issuers’ incentives to avoid downgrade, and decreases with their earnings managementconstraints and the strength of the external monitoring. Surprisingly, such accrual management significantlyincreases the likelihood of a favorable resolution—issuers in the top half of the discretionary accruals distribution are24 percent less likely to be downgraded than those in the propensity score matched bottom half. We find that issuersthat avoid downgrades through income-increasing accrual management significantly underperform those that do notover the ensuing year, mitigating the signaling or measurement error explanations for our results. Finally, we find thataccrual management does not reflect attempts to improve short-term credit quality