The purpose of this paper is to investigate the effect of real earnings managements (hereafter,REM) on cost of debt and future performance measured as earnings and cash flows from operations in non-listed companies. In addition, this paper examines a relative effect of REM and AEM (accruals-based earnings managements) on cost of debt and future performance,collectively. Earnings management can be classified into two categories: accruals-based earnings management and real activity manipulation. AEM involves within-GAAP accounting choices that try to “obscure” or “mask” true economic performance. Schipper (1989) defines AEM as purposeful intervention in the external financial reporting process, with a view to obtaining private gain for stockholders or managers. REM is defined as “management actions that deviate from normal business practices, undertaken with the primary objective of meeting certain earnings thresholds” (Roychowdhury 2006, 336). REM occurs when managers undertake actions that change the timing or structuring of an operation, investment, and/or financing transaction in an effort to influence the output of the accounting system. Specifically, these abnormal real activities distort not only the fundamentals of the business but also the quality of reported earnings, and thus increase information asymmetries between managers and outside investors with respect to a firm’s true earnings performance. This increases information risk, and creates an adverse selection problem, on the part of outside investors. Rational debt-holders therefore demand a premium for bearing this REM-related information risk, which in turn leads us to observe a positive relation between the intensity of REM and the cost of debt. Given the scarcity of evidence on the above issue, we are motivated to test whether REM is an additional factor which increases information risk, and thus the association between the intensity of REM and the cost of equity is positive, even after controlling for the cost of debt effect of AEM and other firm-specific risk factors including size, debt ratio, and growth ratio. Meanwhile, prior research provides limited evidence that REM has a negative impact on subsequent operating performance (Gunny 2005; Xu 2007; Leggett et al. 2009; Gunny 2010). Ewert and Wagenhofer (2005) argue that REM “is costly and directly reduces firm value.” Cohen et al. (2008) state REM is “likely to be more costly to shareholders” than AEM. The Graham et al. (2005) indicates managers think all companies should use REM to manage earnings as long as “the real sacrifices are not too large.” We examine whether the value implications are different depending on the type of earnings management employed REM and AEM. Further, we examine the extent to which REM and AEM affects subsequent operating performance. We expect that all else being equal, REM and AEM negatively affect future operating performance. In particular, a negative impact is greater for REM activities than for AEM activities. To do this, we measure REM using Roychowdhury (2006)'s method, three type of real earnings management are considered : unusually large sales discounts to boost earnings temporarily;overproduction in order to lower the cost of goods sold; and abnormal cuts in discretionary expenses (including advertising expenses and selling, general and administrative expenses) to boost earnings, and AEM using ROA performance-adjusted discretionary accruals following Kothari et al. (2005)'s method. For a dependent variable, cost of debt is estimated as a average value from three variables of borrowing yield spread. The borrowing yield spread is calculated as deducting a 3-year treasury bond from loan interest rate. Observations of this paper are 40,216 firm-years in non-listed companies which are not listed in Korea security market from 2004 to 2009. Findings of this paper are following. First, this paper finds a positive relationship between a abnormal cash flows from operations, abnormal production cost, abnormal discretionary expenditure,and a aggregate variable and cost of debt, respectively. This result is still valid even after controlling for firm size, leverage ratio, and growth. This finding suggests that firms with high level of earnings through real earnings managements are more likely to experience a high cost of debt and debt-holders perceive it and tend to require a high borrowing interest rate even a firm reports good performance. This also implies that debt-holders recognize earnings managements through real activities. Second, this paper finds that REM has a greater impact on cost of debt than AEM. This means that debt-holders require a higher borrowing interest rate to REM rather than AEM and give a penalty in engaging real earnings management. Third, this paper finds a negative relationship between REM and future performance measured by future earnings and future cash flows from operations. Specifically, firms with high level of earnings through REM are more likely to experience a lower future performance. When it comes to AEM, a negative relationship between AEM and future performance is significant. Fourth, a relative important of earnings managements on future performance is greater for REM when we measure future performance as future earnings while AEM has greater impact on future cash flows from operations. Finally, REM negatively influences on future earnings rather than future cash flows from operations while a negative impact of AEM is greater in future cash flows from operations than future earnings. These results are still hold even after appling a fractional ranks variable rather than a continuous variable as a dependent variable. And also t-statistics from Newey and West (1987) are significant, suggesting that our results are robust. In sum, the results of this paper indicate that the effect of earnings managements on cost of debt is different depending on a vehicle. And investors in debt market differently evaluate a reported earnings of non-listed companies. The findings in this study have various implications. Given the lack of empirical findings about non-listed companies, the results of this paper suggest that the relationship between earnings managements and cost of debt varies depending on a vehicle and a relative impact of earnings management on future performance also varies. These results are consistent with the notion that debt-holders do perceive these real activities as opportunistic behaviors, but AEM rather as favorable operational activities, and also our results suggest REM and AEM adversely affect future operating performance consistent with the expectations. Therefore, these findings of this paper are very useful and provide a lot of important implications to regulators, investors and creditors that are interested in cost of debt. Academics can also apply the discussion in this paper for related researches.