Earnings Management in Response to a Windfall Tax in the Water and Sewerage Utility Companies in England and Wales

Lancaster University Management School Working Paper No. LUMSWP2003/017

41 Pages Posted: 23 Jun 2003  

Wendy Beekes

Lancaster University - Department of Accounting and Finance

Date Written: June 10, 2003

Abstract

This study examines whether the ten Water and Sewerage group Companies (WaSCs) in England and Wales used accounting accruals to decrease earnings and in turn reduce political costs in response to the Windfall Tax. In particular, this study encompasses a sample period when there was widespread speculation about a potential Windfall Tax and the 'monopolistic' level of utility company profits. Therefore considerable incentives existed for managers to use the accounting discretion available to them to reduce potential political costs. The results show that WaSCs did not use income-decreasing earnings management in response to the Windfall Tax in the year prior to the 1992 or the 1997 General Election. In contrast the evidence obtained in this study suggests that income-increasing accruals were adopted. The results suggest other pressures were more important to these large group plcs than the threat of politically imposed wealth transfers.

Keywords: accounting accruals, earnings management, water and sewerage companies, windfall tax

JEL Classification: C23, H29, L43, L59, L99, M41, M43

Suggested Citation

Beekes, Wendy, Earnings Management in Response to a Windfall Tax in the Water and Sewerage Utility Companies in England and Wales (June 10, 2003). Lancaster University Management School Working Paper No. LUMSWP2003/017. Available at SSRN: https://ssrn.com/abstract=415641 or http://dx.doi.org/10.2139/ssrn.415641

Wendy Beekes (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

Lancaster LA1 4YX
United Kingdom
++44 (0)1524 593623 (Phone)

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