Managing Earnings with Intercorporate Investments

Journal of Business Finance and Accounting Vol. 33, 2006, pp. 671-695

36 Pages Posted: 30 Apr 2013

See all articles by Øyvind Bøhren

Øyvind Bøhren

BI Norwegian Business School

Jørgen Haug

Norwegian School of Economics (NHH) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 9, 2005

Abstract

We explore to what extent firms deliberately manage their financial reports by exploiting the flexibility of generally accepted accounting principles. Using a sample of Oslo Stock Exchange-listed firms with 20–50% equity holdings in other firms, we find that firms with high financial leverage tend to maximize reported earnings from these investments through their choice between the cost method and the equity method, possibly in an attempt to reduce debt renegotiation costs or to avoid regulatory attention. In contrast, managers do not systematically bias reported earnings to extract private benefits or to signal revised expectations about future cash flows. Firms use different earnings management tools in a consistent way, as the earnings effect of the cost/equity choice is not offset by discretionary accruals.

Keywords: earnings management, cost method, equity method, associated firms, discretionary accruals

JEL Classification: G38, K4, M41

Suggested Citation

Bøhren, Øyvind and Haug, Jørgen, Managing Earnings with Intercorporate Investments (July 9, 2005). Journal of Business Finance and Accounting Vol. 33, 2006, pp. 671-695. Available at SSRN: https://ssrn.com/abstract=2257752

Øyvind Bøhren (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
46410503 (Phone)

Jørgen Haug

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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