Managing Earnings with Intercorporate Investments
Journal of Business Finance and Accounting Vol. 33, 2006, pp. 671-695
36 Pages Posted: 30 Apr 2013
Date Written: July 9, 2005
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: Suggested Citation