Doctor of Philosophy (PhD)



Document Type



Although accounting research continues to focus on earnings management, few studies have done so within the context of a single industry, and only one study to date (Paek 2001) has investigated this phenomenon within the context of U.S. rate-regulated electric utilities. Most utilities are viewed as natural monopolies, and therefore are subjected to rate regulation. These firms are permitted to earn a prescribed rate of return on an approved rate base. Although utilities are subjected to greater scrutiny than non-regulated public companies, regulatory restraint may create incentives to manage earnings (Healy and Whalen 1999), especially coincident with a utility’s request to regulators for a rate increase. I use samples drawn from the electric utility and manufacturing industries to examine the following three research questions. First, does earnings management in rate-regulated electric utilities, as represented by the magnitude of discretionary accruals, significantly differ from that observed in comparable non-regulated companies? The second question probes whether the deregulation of the generation and marketing of electricity within the electric utility industry that began in the late 1990s, significantly altered the opportunity to observe earnings management. The third question focuses on whether rate-regulated electric utilities manage earnings downward in the year that they file for a rate increase? And, if indications of earnings management are observed, is industry-specific GAAP used to decrease earnings? I estimate the earnings management metric, discretionary accruals, using accrual expectation models from prior research. Results indicate the magnitude of discretionary accruals, on average, is significantly smaller for rate-regulated electric utilities than for non-regulated companies suggesting that rate regulation is adequate in constraining earnings management. This is corroborated by the finding that earnings management metric increased for those utilities affected by deregulation. Finally, in an intra-industry comparison, I observe significantly lower discretionary accruals for utilities in the year they request rate increases when compared to years in which rate increases are not requested. This result is consistent with opportunistic earnings management and raises a social welfare issue. Evidence that industry-specific GAAP is used to manage earnings downward is inconclusive.



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Release the entire work immediately for access worldwide.

Committee Chair

K.E. Hughes II

Included in

Accounting Commons