Although accounting research continues to focus on earnings management, few studies have done so within the context of a single industry, and only one study to date (Paek 2001) has investigated this phenomenon within the context of U.S. rate-regulated electric utilities. Most utilities are viewed as natural monopolies, and therefore are subjected to rate regulation. These firms are permitted to earn a prescribed rate of return on an approved rate base. Although utilities are subjected to greater scrutiny than non-regulated public companies, regulatory restraint may create incentives to manage earnings (Healy and Whalen 1999), especially coincident with a utilitys request to regulators for a rate increase. I use samples drawn from the electric utility and manufacturing industries to examine the following three research questions. First, does earnings management in rate-regulated electric utilities, as represented by the magnitude of discretionary accruals, significantly differ from that observed in comparable non-regulated companies? The second question probes whether the deregulation of the generation and marketing of electricity within the electric utility industry that began in the late 1990s, significantly altered the opportunity to observe earnings management. The third question focuses on whether rate-regulated electric utilities manage earnings downward in the year that they file for a rate increase? And, if indications of earnings management are observed, is industry-specific GAAP used to decrease earnings? I estimate the earnings management metric, discretionary accruals, using accrual expectation models from prior research. Results indicate the magnitude of discretionary accruals, on average, is significantly smaller for rate-regulated electric utilities than for non-regulated companies suggesting that rate regulation is adequate in constraining earnings management. This is corroborated by the finding that earnings management metric increased for those utilities affected by deregulation. Finally, in an intra-industry comparison, I observe significantly lower discretionary accruals for utilities in the year they request rate increases when compared to years in which rate increases are not requested. This result is consistent with opportunistic earnings management and raises a social welfare issue. Evidence that industry-specific GAAP is used to manage earnings downward is inconclusive.
| Identifer | oai:union.ndltd.org:LSU/oai:etd.lsu.edu:etd-07032007-113109 |
| Date | 03 July 2007 |
| Creators | Omonuk, Joseph Ben |
| Contributors | K.E. Hughes II, William Lane, Joseph Legoria, Kevin Melendrez, Ken Reichelt, Krishna Paudel |
| Publisher | LSU |
| Source Sets | Louisiana State University |
| Language | English |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.lsu.edu/docs/available/etd-07032007-113109/ |
| Rights | unrestricted, I hereby certify that, if appropriate, I have obtained and attached herein a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to LSU or its agents the non-exclusive license to archive and make accessible, under the conditions specified below and in appropriate University policies, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report. |
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