Special Purpose Entities: Empirical Evidence on Determinants and Earnings Management

54 Pages Posted: 9 May 2005

See all articles by Mei Feng

Mei Feng

University of Pittsburgh - Katz Graduate School of Business

Jeffrey Gramlich

Carson College of Business

Sanjay Gupta

Michigan State University - Eli Broad College of Business

Date Written: January 9, 2006

Abstract

This paper investigates the usage, determinants and earnings effect of special purpose entities based on a large sample of firms from 1994 to 2004. We find that SPE use has grown substantially in recent years and that the number of SPEs is related to economic motivations, financial reporting objectives and corporate governance. Specifically, SPE use is significantly higher for firms with greater need for funds and higher marginal tax rate. We also find that SPE use increases with closeness to debt covenants, CEO's bonus and weak corporate governance. Finally, we document that the evidence is consistent with SPEs set up for financial reporting purposes playing a role in managing accruals and earnings upwards, whereas the same does not appear to be the case for SPEs set up mainly for economic reasons.

Keywords: off-balance sheet, special purpose entities, leverage, accruals, return on equity

JEL Classification: G32, G39, M41, M43, H25

Suggested Citation

Feng, Mei and Gramlich, Jeffrey and Gupta, Sanjay, Special Purpose Entities: Empirical Evidence on Determinants and Earnings Management (January 9, 2006). Available at SSRN: https://ssrn.com/abstract=717301 or http://dx.doi.org/10.2139/ssrn.717301

Mei Feng

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Jeffrey Gramlich (Contact Author)

Carson College of Business ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

HOME PAGE: http://https://business.wsu.edu/research-faculty/institutes/hoops-institute/

Sanjay Gupta

Michigan State University - Eli Broad College of Business ( email )

632 Bogue Street, 520 BCC
East Lansing, MI 48824
United States
517-432-6488 (Phone)

HOME PAGE: http://www.broad.msu.edu/

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