Doing Good When Doing Well: Evidence on Real Earnings Management

46 Pages Posted: 12 Jun 2020 Last revised: 4 May 2021

See all articles by William Grieser

William Grieser

Texas Christian University ; Texas Christian University - M.J. Neeley School of Business

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 4, 2021

Abstract

We provide evidence on earnings management by exploiting temporary exogenous shocks to
utility firms’ sales arising from 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. This evidence, while indirect,
is suggestive of earnings management activities. 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, behavior that is highly consistent with the presence of
real earnings management efforts. We find no convincing evidence supporting possible alternative
explanations for this evidence, but we do find limited support for the presence of a larger
giving-weather relation when earnings management incentives are likely to be elevated. If other real
decisions with similar characteristics scale proportionally to charitable giving, our findings suggest
that the overall magnitude of real earnings management activities could be quite substantial.

Keywords: real earnings management; charitable giving; weather; regulated utilities

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 4, 2021). 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

Texas Christian University - M.J. Neeley School of Business ( 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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