Earnings Management and Deregulation: The Case of Motor Carriers

42 Pages Posted: 9 Jan 2008

See all articles by Seong-Yeon Cho

Seong-Yeon Cho

Oakland University

Kevin D. Sachs

Hofstra University - Department of Accounting, Taxation and Legal Studies in Business, Frank G. Zarb School of Business

Date Written: January 3, 2008

Abstract

We examine the discretionary accounting choices of federally-regulated interstate motor carriers during the period in the 1970s when the U.S. government successfully deregulated the industry. We predict that during this period of heightened political cost, motor carriers used income decreasing earnings management to lessen public perception of excessive industry profits and thus to avoid deregulation. We test the hypothesis on a sample of publicly-traded, federally-regulated motor carriers using the accruals model of Dechow et al. (1995) augmented as a fixed-effects model (Key 1997, Han and Wang 1998) with a control for performance (Kothari et al. 2005). We compare accruals during the political-cost deregulation period of 1975-1979 against various benchmark periods before and after industry deregulation.

We find no evidence of income-decreasing earnings management during the period of deregulation when compared to all of our benchmark measures from the before period. In fact, when before periods are used as benchmarks, our evidence is consistent with income-increasing earnings management during the political-cost period. We do however, find evidence of significant income-decreasing earnings management when the after periods are used as benchmarks. We offer several possible explanations for our results.

Keywords: Earnings management, Discretionary accruals, Political cost, Deregulation

JEL Classification: K23, L51, L92, M41, M43

Suggested Citation

Cho, Seong Y and Sachs, Kevin D., Earnings Management and Deregulation: The Case of Motor Carriers (January 3, 2008). Available at SSRN: https://ssrn.com/abstract=1081334 or http://dx.doi.org/10.2139/ssrn.1081334

Seong Y Cho

Oakland University ( email )

Rochester, MI 48084
United States
248-370-4307 (Phone)

Kevin D. Sachs (Contact Author)

Hofstra University - Department of Accounting, Taxation and Legal Studies in Business, Frank G. Zarb School of Business ( email )

134 Hofstra University
Hempstead, NY 11549
United States

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