Abstract

http://ssrn.com/abstract=1087808
 
 

References (47)



 
 

Citations (6)



 


 



Warranty Reserve: Contingent Liability, Information Signal, or Earnings Management Tool?


Daniel A. Cohen


University of Texas at Dallas - Naveen Jindal School of Management

Masako N. Darrough


City University of New York - Baruch College - Stan Ross Department of Accountancy

Rong Huang


City University of New York (CUNY) - Stan Ross Department of Accountancy

Tzachi Zach


Ohio State University (OSU) - Fisher College of Business

August 31, 2010

Accounting Review, 2011

Abstract:     
We examine the information role of accounting disclosures on warranties, utilizing a database that became available due to the requirements of FIN 45. First, because firms use warranty policies as a business strategy to promote their products, a warranty reserve can serve two roles: an information signal regarding product quality as well as a contingent liability. Consistent with this view, we find that the stock market recognizes that: (1) the warranty reserve contains information about firms’ future performance, and (2) the reserve is a liability. Second, because warranty accruals require estimation of future claims, they can be used as a tool of earnings management. Our evidence indicates that managers use warranty accruals to manage earnings opportunistically to meet earnings targets. Finally, we find that the stock market recognizes the understatement of warranty liabilities of firms that managed earnings.

Number of Pages in PDF File: 49

Keywords: Warranty, Contigent Liaiblity, Signaling, Earnings Management

JEL Classification: M41, M44, M43

working papers series





Download This Paper

Date posted: January 30, 2008 ; Last revised: September 3, 2010

Suggested Citation

Cohen, Daniel A. and Darrough, Masako N. and Huang, Rong and Zach, Tzachi, Warranty Reserve: Contingent Liability, Information Signal, or Earnings Management Tool? (August 31, 2010). Accounting Review, 2011. Available at SSRN: http://ssrn.com/abstract=1087808 or http://dx.doi.org/10.2139/ssrn.1087808

Contact Information

Daniel A. Cohen
University of Texas at Dallas - Naveen Jindal School of Management ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)
972-883-6811 (Fax)
Masako N. Darrough
City University of New York - Baruch College - Stan Ross Department of Accountancy ( email )
One Bernard Baruch Way
New York, NY 10010
United States
646 312 3183 (Phone)
646 312 3161 (Fax)
Rong Huang
City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )
One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
(646)312-3204 (Phone)
Tzachi Zach (Contact Author)
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

Feedback to SSRN


Paper statistics
Abstract Views: 3,933
Downloads: 707
Download Rank: 19,132
References:  47
Citations:  6

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.359 seconds