Institutional and Structural Constraints to Detecting Earnings Management of Firms Subjected to Price Regulation
Social Science Research Network
This study operationalises a theoretical model of political costs specific to the establishment of the Prices Surveillance Authority in Australia in 1984 and its implications for firms targeted in this political action. It identifies and defines a rigorous linkage between political actions likely to transfer wealth away from targeted firms, and firms' earnings manipulation. Using both cross-sectional and longitudinal approaches, the study seeks to provide some evidence on the incentives for
... incentives for managers of firms targeted in a political action to manipulate earnings in a way which would be conducive to alleviating their exposure to wealth transfer. Contrary to expectations, the evidence presented in this study does not suggest that firms are more likely to effect negative accounting accruals during periods when they are subjected to intense political scrutiny as a means of reducing their exposure to political costs. Further examination of the institutional environment and structural arrangements for price surveillance suggest that while establishing a linkage between political costs and earnings management by firms is a necessary condition, it is not by itself a sufficient condition. Earnings management is but one of several options which can be used to deflect political costs by firm managers.