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

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

working papers series