Regulation of Prices and Earnings Management

Abstract

Using two samples of New Zealand listed firms this study examines discretionary accruals in relation to two sets of price control regulations. These regulations allowed regulated firms to apply for price increases in 1971 and 1972. A modified version of Jones (1991) model and the Industry model are used. Discretionary accruals are tested longitudinally and cross-sectionally. The cross-sectional tests can mitigate the problem of model misspecification and measurement error since firms in samples have different event years. The results indicate that firms used income decreasing discretionary accruals in the years they could apply for price increases.

JEL Classification: M41