Accounting Choice in Price-Regulated Industries – Unintended Consequences?

Abstract:     
This paper investigates the interplay between price-regulation and accounting choice in Germany. As an EU member state Germany is required to regulate prices in the gas and electricity utility industry. Firm-specific revenue caps are determined during a cost audit that is based on the regulated companies’ financial statements. This study investigates the effects of a major change in German GAAP in 2009 on firm-specific revenue caps. We find that regulated firms are more likely than comparable firms to voluntarily adopt new German GAAP early, thereby achieving higher regulated revenues. Manually analyzing financial statements we are able to estimate the increase in firm-specific allowed revenues for the regulation period 2013 to 2017. Depending on the underlying assumptions, the discounted effect deflated by book equity of 2008 is on average between 12.91% and 24.36%. We contribute to the literature on accounting choice and regulation in several ways. First, we directly observe accounting choices made by managers and do not rely on earnings management proxies. Second, we are able to compute cash flow consequences attributable to these accounting choices. Third, our results suggest that both energy market regulators and standard setters should account for the interplay between price-regulation and accounting.

Number of Pages in PDF File: 45

Keywords: accounting choice, incentive-regulation, gas utility industry, price-regulation, BilMoG, German-GAAP

JEL Classification: G18, M40, M41, M49

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