This paper exploits the 1990 change in capital adequacy regulations to construct more powerful tests of capital and earnings management effects on bank loan loss provisions. We find strong support for the hypothesis that loan loss provisions are used for capital management. We do not find evidence of earnings management via loan loss provisions. We also document the reasons for the conflicting results on these effects observed in prior studies. Additionally, we find that loan loss provisions are negatively related to both future earnings changes and contemporaneous stock returns contrary to the signaling results documented in prior work

We investigate whether acquiring firms attempt to increase their stock price prior to a stock for stock merger in order to reduce the cost of buying the target. In a sample of stock for stock mergers completed between 1985 and 1990, we find that acquiring firms manage earnings upward in the periods prior to the merger agreement. Our results also indicate that the degree of income increasing earnings management is positively related to the relative size of the merger

This study investigates whether managers who issue annual earnings forecasts manage reported earnings toward their forecasts, fearing legal actions by investors and loss of reputation for accuracy. I hypothesize that managers make income-increasing (decreasing) accounting decisions when earnings would otherwise be below (above) management forecasts, and that the earnings management activity is increasing in expected forecast error costs.1 These costs are likely higher for overestimates than for underestimates and are increasing in the magnitude of the forecast

Price controls 1 have a major impact on firms' earnings and cash flows. Because price control regulation is costly to firms, it is a type of regulatory intervention that can impact a firm's accounting decisions (Watts and Zimmerman, 1978). Thus, regulatory changes that give firms relief from price controls provide incentives for earnings management. This paper examines discretionary accruals made by New Zealand manufacturing firms in response to two sets of regulations issued in 1971 and 1972. These regulations allowed manufacturing firms to apply for price increases to gain relief from financial hardship caused by the 1970 Price Freeze Regulation. Using a modified accruals mode! that adjusts for price‐level movements, the paper tests discretionary accruals of two samples of manufacturing firms and one control sample of nonmanufacturing firms. The results provide evidence of income decreasing discretionary accruals by manufacturing firms for the years during which they could apply for price increases. The control firms do not exhibit significant discretionary accruals in 1971 or 1972. Also, this paper provides evidence that failing to adjust for price‐level movements in high inflationary periods could result in inferences of income decreasing discretionary accruals where none may exist

Contrary to previous studies, we find managers change depreciation policies in predictable ways. We identify three dimensions of depreciation-policy changes: whether it is a method change or an estimate revision; whether it is income-increasing or decreasing; and whether it applies to new assets only or both new and existing assets. This disaggregation leads to three findings: First, a 1981 tax law altered the frequency of estimate revisions and method changes. Second, firms adopting income-increasing method changes for all assets experience worse performance than those adopting such changes only for new assets. Finally, non-income-increasing policy changes are associated with changes in investment opportunities

This study tests the bonus-maximization hypothesis that managers make discretionary accrual decisions to maximize their short-term bonuses. By using the management and financial reporting database of a large conglomerate, we extend previous investigations in two ways. First, the analysis is conducted using business unit-level data, which reduces the aggregation problem that is likely to arise using firm-level data. Second, managers in this setting are paid bonuses based solely on business unit earnings. The potentially confounding effects of long-term performance and stock-based incentive compensation are thus absent. These innovations yield robust evidence consistent with Healy (1985