Posted: 19 May 2005
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: 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