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Earnings Management in Response to Regulatory Price Review. A Case Study of the Political Cost Hypothesis in the Water and Electricity Sectors in England and Wales


Wendy Beekes


Lancaster University - Department of Accounting and Finance

September 8, 2003

Lancaster University Management School Working Paper No. LUMSWP2003/056

Abstract:     
This paper examines the response of the water and electricity group companies to regulatory pressure and in particular, the first regulatory price review after privatisation. The sample period incorporates industry-specific regulatory price reviews in both the water and electricity sectors and provides an interesting case study to examine the political cost hypothesis. The results obtained in this study confirm that the regulatory process has an impact on the group company's financial reporting decisions: there is evidence of income-decreasing earnings management in the year of regulatory price review in both sectors. However there is little evidence to support the premise of income-decreasing earnings management in the electricity sector, following the regulator's decision to re-open the distribution price review in 1995.

Number of Pages in PDF File: 40

Keywords: accounting accruals, earnings management, price cap regulation, regulatory review, regional electricity companies, water and sewerage companies

JEL Classification: C23, L43, L50, L99, M41, M43

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Date posted: October 10, 2003  

Suggested Citation

Beekes, Wendy, Earnings Management in Response to Regulatory Price Review. A Case Study of the Political Cost Hypothesis in the Water and Electricity Sectors in England and Wales (September 8, 2003). Lancaster University Management School Working Paper No. LUMSWP2003/056. Available at SSRN: http://ssrn.com/abstract=444020 or http://dx.doi.org/10.2139/ssrn.444020

Contact Information

Wendy Beekes (Contact Author)
Lancaster University - Department of Accounting and Finance ( email )
Lancaster LA1 4YX
United Kingdom
++44 (0)1524 593623 (Phone)
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