Earnings Management to Minimize Superfund Cleanup and Transaction Costs

Posted: 19 May 2005  

Derek Johnston

Colorado State University, Fort Collins - Department of Accounting

Steve Rock

University of Colorado at Boulder - Department of Accounting

Abstract

We investigate whether firms identified as potentially responsible parties (PRPs) under the Comprehensive Environmental Response, Compensation, and Liability Act (more commonly known as Superfund) appear to manipulate earnings to minimize their exposure to Superfund cleanup and transaction costs. We analyze the discretionary accrual behavior of 612 PRPs from 1981 to 1995 and increase the power of our tests by identifying those PRPs with the most incentive to manage earnings during PRP identification years. The results provide robust evidence consistent with the hypothesis that these PRPs use income-reducing discretionary accruals during PRP identification years in an attempt to minimize Superfund cleanup and transaction costs. We also consider whether PRPs' incentives to manage earnings change in response to a change in the EPA regulatory regime and find modest evidence consistent with our conjecture.

Keywords: Earnings management, environmental, superfund

JEL Classification: M41, M43, Q58

Suggested Citation

Johnston, Derek and Rock, Steve, Earnings Management to Minimize Superfund Cleanup and Transaction Costs. Contemporary Accounting Research, Vol. 22, No. 3, Fall 2005. Available at SSRN: https://ssrn.com/abstract=725643

Derek Johnston (Contact Author)

Colorado State University, Fort Collins - Department of Accounting ( email )

256 Rockwell Hall
Fort Collins, CO 80523
United States
970-491-6443 (Phone)

Steven Karl Rock

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States
303-735-5009 (Phone)
303-492-5962 (Fax)

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