Accounting Discretion: Use or Abuse? Restructuring Charges - 1989-1996

45 Pages Posted: 8 May 2007

Date Written: May 2007


This paper provides the first large sample empirical evidence on the extent to which restructuring charges are associated with earnings management. Further, the study examines whether this association changed following FASB action to curtail suspected restructuring related earnings management. We examine 247 restructuring charges recorded between 1989 and 1992, a time period when restructurings were increasing in frequency and virtually unregulated with respect to accounting guidance. We also analyze a sample of 112 firms that recorded restructurings in 1995 and 1996, a period following the FASB action to standardize accounting for restructurings.

We use several empirical specifications to control for the portion of the restructuring charge attributable to fundamental economic performance and macro-economic factors. We then estimate a series of multivariate regressions to determine if the restructuring charge is associated with earnings management proxies, a time dummy for reporting regime change, and interactions between the two. We document a significant decrease in the magnitude of the average charge after the FASB action. In the pre-regulation period, we document associations between the excess component of the restructuring accrual and firm size, leverage and CEO changes; however these relations do not exist in the post-regulatory period. These results suggest that FASB action had a significant effect on curtailing earnings management via restructurings.

Keywords: earnings management, restructuring charges, special items, discretionary accruals

JEL Classification: M41, M43, G34, G38, G32

Suggested Citation

Bens, Daniel A. and Johnston, Rick M., Accounting Discretion: Use or Abuse? Restructuring Charges - 1989-1996 (May 2007). Available at SSRN: or

Daniel A. Bens (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex

Rick M. Johnston

Independent ( email )

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