Does Earnings Management Relieve the Negative Effects of Mandatory Pension Contributions?

Financial Management, Forthcoming

67 Pages Posted: 16 Apr 2014 Last revised: 24 Mar 2016

See all articles by Hieu V. Phan

Hieu V. Phan

University of Massachusetts Lowell

Hinh Khieu

Prairie View A&M University

Joseph H. Golec

University of Connecticut - Department of Finance

Date Written: February 16, 2015

Abstract

Mandatory pension contributions (MCs) are negative shocks to a firm's liquidity that can unfavorably impact its cost of capital, financing, and investment plans. We study whether firms faced with MCs use both non-cash (NEM) and cash generating earnings management (CEM) to partly offset their negative effects. Firms increase CEM, but not NEM when they experience MCs. We also find that earnings management associated with MCs does not substantially lower the weighted cost of capital, or boost external funding and investment. Our findings suggest that MC firms use CEM because it directly generates cash to fund MCs, whereas NEM does not.

Keywords: earnings management; financial constraint; mandatory pension contribution; financing; investment

JEL Classification: G30; G31; G32; M41

Suggested Citation

Phan, Hieu V. and Khieu, Hinh and Golec, Joseph, Does Earnings Management Relieve the Negative Effects of Mandatory Pension Contributions? (February 16, 2015). Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2425339 or http://dx.doi.org/10.2139/ssrn.2425339

Hieu V. Phan (Contact Author)

University of Massachusetts Lowell ( email )

72 University Avenue
Lowell, MA 01854
United States

Hinh Khieu

Prairie View A&M University ( email )

P. O. Box 519
Prairie View, TX 77446
United States

Joseph Golec

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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