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Earnings Management and Deregulation: The Case of Motor Carriers

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Document pages: 42 pages

Abstract: We examine the discretionary accounting choices of federally-regulated interstate motor carriers during the period in the 1970s when the U.S. government successfully deregulated the industry. We predict that during this period of heightened political cost, motor carriers used income decreasing earnings management to lessen public perception of excessive industry profits and thus to avoid deregulation. We test the hypothesis on a sample of publicly-traded, federally-regulated motor carriers using the accruals model of Dechow et al. (1995) augmented as a fixed-effects model (Key 1997, Han and Wang 1998) with a control for performance (Kothari et al. 2005). We compare accruals during the political-cost deregulation period of 1975-1979 against various benchmark periods before and after industry deregulation. We find no evidence of income-decreasing earnings management during the period of deregulation when compared to all of our benchmark measures from the before period. In fact, when before periods are used as benchmarks, our evidence is consistent with income-increasing earnings management during the political-cost period. We do however, find evidence of significant income-decreasing earnings management when the after periods are used as benchmarks. We offer several possible explanations for our results.

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