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
Date Written: February 16, 2015
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: Suggested Citation