Doing Good When Doing Well: Evidence on Real Earnings Management

39 Pages Posted: 12 Jun 2020

See all articles by William Grieser

William Grieser

Texas Christian University

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce

Date Written: May 18, 2020

Abstract

We provide evidence on earnings management by exploiting temporary exogenous shocks to utility firms’ sales in the form of annual weather variation. We find that sample firms’ sales are highly sensitive to annual changes in average temperatures in the region where the firm operates, but this sensitivity disappears quickly moving down the income statement. We interpret this as indirect evidence of earnings management. In search of direct evidence, we study charitable giving decisions by sample firms and uncover a significant positive sensitivity of charitable spending to weather-driven demand shocks. Given the magnitude of this detected relation and the economic returns from charitable giving, this behavior appears to be driven by a desire to smooth earnings.

Keywords: real earnings management; charitable giving; weather shocks

JEL Classification: M41, G31, G32, L21

Suggested Citation

Grieser, William and Hadlock, Charles J. and Pierce, Joshua R., Doing Good When Doing Well: Evidence on Real Earnings Management (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3605387 or http://dx.doi.org/10.2139/ssrn.3605387

William Grieser (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

315 Eppley Center
East Lansing, MI 48824-1121
United States
517-353-9330 (Phone)
517-432-1080 (Fax)

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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