The Interaction between Accruals Management and Financial Engineering with Special Purpose Entities
Posted: 6 Mar 2006
Date Written: January 2006
We present evidence consistent with managers using opportunistic Special Purpose Entities (SPE) and discretionary accruals as substitutes to manage reported earnings. Using a sample of industrial US listed firms for the period 2000-2004; we estimate a set of simultaneous equations that captures managers' incentives to manipulate reported earnings. We find a significant negative association between discretionary accruals and opportunistic SPE after controlling some determinants of each variable. Also, results show that opportunistic SPE are less variable than the normal variation of such entities and present a zero mean across years. Overall, our research show that managers use discretionary accruals and opportunistic SPE as partial substitute to manage reported earnings. Despite sensitivity checks, measurement error in discretionary accruals proxy and opportunistic SPE estimation model remains an alternative explanation for the results.
Keywords: Opportunistic Special Purpose Entities, discretionary accruals, earnings management, firm value
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