Special Purpose Vehicles: Empirical Evidence on Determinants and Earnings Management

44 Pages Posted: 18 Sep 2006 Last revised: 5 Oct 2010

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: November 1, 2009

Abstract

We investigate the use, determinants, and earnings effects of special purpose vehicles (SPVs). Based on a proxy of SPV activity that can be applied to a broad cross-section of firms over time, we find a two-and-a-half fold monotonic increase in the percentage of firms using at least one SPV during the eight-year period from 1997 through 2004. Tobit regressions of the determinants of SPV use show that SPV activity increases with financial reporting incentives and economic and tax motivations, but strong corporate governance tends to mitigate their use. In addition, the evidence is consistent with SPVs arranged for financial reporting purposes being associated with earnings management, whereas the same does not appear to be the case for SPVs set up mainly for economic, tax, and other reasons.

Keywords: Special purpose vehicles, off-balance sheet entities, earnings management, taxes, corporate governance

JEL Classification: M41, G35

Suggested Citation

Feng, Mei and Gramlich, Jeffrey and Gupta, Sanjay, Special Purpose Vehicles: Empirical Evidence on Determinants and Earnings Management (November 1, 2009). Accounting Review, Vol. 84, No. 6, 2009; AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=931214 or http://dx.doi.org/10.2139/ssrn.931214

Mei Feng

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

Pittsburgh, PA 15260
United States

Jeffrey Gramlich

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 (Contact Author)

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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