Private Firms’ Incentives and Opportunities to Manage Earnings: Evidence from the use of Inflation Adjustments

Journal of Business Finance and Accounting, Forthcoming

58 Pages Posted: 19 Sep 2017 Last revised: 24 Aug 2021

See all articles by Felipe Restrepo

Felipe Restrepo

University of Western Ontario - Richard Ivey School of Business

Jérôme Taillard

Babson College

Date Written: August 21, 2021

Abstract

We examine the behavior of a large sample of private firms before and after the elimination of an inflation adjustment system in Colombia in 2007. We find that firms avoid reporting small pre-tax losses by exercising considerable discretion in their use of inflation adjustments, and find that this discretion is greater for firms that rely more on bank financing. Furthermore, firms that manage earnings to report small positive profits issue more bank debt the year following the reporting. After the law change, firms resort to other means to report positive earnings. In particular, the use of non-operating earnings increases, attributable in part to a higher incidence of tangible asset sales.

Keywords: bank monitoring, private firms, earnings management, accounting discretion, inflation adjustments

JEL Classification: M4, M41, G21

Suggested Citation

Restrepo, Felipe and Taillard, Jérôme, Private Firms’ Incentives and Opportunities to Manage Earnings: Evidence from the use of Inflation Adjustments (August 21, 2021). Journal of Business Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3037689 or http://dx.doi.org/10.2139/ssrn.3037689

Felipe Restrepo (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1255 Western Road
London, Ontario N6G 0N1
Canada

HOME PAGE: http://www.ivey.uwo.ca/faculty/directory/felipe-restrepo/

Jérôme Taillard

Babson College ( email )

323 Tomasso Hall
Babson Park, MA 02457
United States
6145994184 (Phone)

HOME PAGE: http://https://www.babson.edu/academics/faculty/faculty-profiles/jerome-taillard.php

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