This study examines the role of negative peer events, specifically initial bond defaults, in driving leverage manipulation of non-defaulting firms within the same region. Controlling for firm-specific time-varying characteristics, we find that initial bond defaults within a province are associated with an increase in leverage manipulation among non-defaulting firms. Two potential mechanisms underlying this relationship include increased financial constraints for these firms and elevated investor risk perception of the local bond market. The positive impact of bond defaults on leverage manipulation is more pronounced for financially constrained firms, firms with severe information asymmetry, and those affected by high-rated bond and principal defaults. We further show that companies that manipulate their debt ratios experience higher default risk. Our findings have important implications for transparent disclosure and highlight the negative effect of regional bond defaults on corporate financial reporting practices.