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Earnings Management to Minimize Superfund Clean†up and Transaction Costs

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  • DEREK JOHNSTON
  • STEVE ROCK

Abstract

We investigate whether firms identified as potentially responsible parties (PRPs) under the Comprehensive Environmental Response, Compensation, and Liability Act (more commonly known as Superfund) appear to manipulate earnings to minimize their exposure to Superfund clean†up and transaction costs. We analyze the discretionary accrual behavior of 612 PRPs from 1981 to 1995 and increase the power of our tests by identifying those PRPs with the most incentive to manage earnings during PRP identification years. The results provide robust evidence consistent with the hypothesis that these PRPs use income†reducing discretionary accruals during PRP identification years in an attempt to minimize Superfund clean†up and transaction costs. We also consider whether PRPs' incentives to manage earnings change in response to a change in the EPA regulatory regime and find modest evidence consistent with our conjecture.

Suggested Citation

  • Derek Johnston & Steve Rock, 2005. "Earnings Management to Minimize Superfund Clean†up and Transaction Costs," Contemporary Accounting Research, John Wiley & Sons, vol. 22(3), pages 617-642, September.
    • Handle: RePEc:wly:coacre:v:22:y:2005:i:3:p:617-642
    DOI: 10.1506/CXBY-2NXT-DVWC-2TJR
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    Cited by:

    1. Tsang, Albert & Frost, Tracie & Cao, Huijuan, 2023. "Environmental, Social, and Governance (ESG) disclosure: A literature review," The British Accounting Review, Elsevier, vol. 55(1).
    2. David Godsell & Michael Welker & Ning Zhang, 2017. "Earnings Management During Antidumping Investigations in Europe: Sample‐Wide and Cross‐Sectional Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 55(2), pages 407-457, May.
    3. Yang, Mian & Tang, Wenliang, 2022. "Air pollution, political costs, and earnings management," Emerging Markets Review, Elsevier, vol. 51(PA).
    4. Thomas Schneider & Giovanna Michelon & Mari Paananen, 2018. "Environmental and Social Matters in Mandatory Corporate Reporting: An Academic Note," Accounting Perspectives, John Wiley & Sons, vol. 17(2), pages 275-305, June.
    5. Michelle Rodrigue & Michel Magnan & Charles Cho, 2013. "Is Environmental Governance Substantive or Symbolic? An Empirical Investigation," Journal of Business Ethics, Springer, vol. 114(1), pages 107-129, April.
    6. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    7. Boland, Matthew & Godsell, David, 2020. "Local soldier fatalities and war profiteers: New tests of the political cost hypothesis," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    8. Jonathan Maurice, 2019. "When environmental accounting choices are not only opportunistic: the case of environmental accounting provisions [Quand les choix comptables liés à l’environnement ne sont pas qu’opportunistes : c," Post-Print hal-02128271, HAL.
    9. Tesfaye T. Lemma & Mehrzad Azmi Shabestari & Martin Freedman & Mthokozisi Mlilo, 2020. "Corporate carbon risk exposure, voluntary disclosure, and financial reporting quality," Business Strategy and the Environment, Wiley Blackwell, vol. 29(5), pages 2130-2143, July.
    10. Huai Zhang & Jin Zhang, 2023. "Political corruption and accounting choices," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 443-481, March.

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