Earnings management in the electric utility industry: profit incentives

Shiyou Li (), Emeka Nwaeze and Jennifer Yin
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Shiyou Li: Texas A&M University Commerce
Emeka Nwaeze: University of Texas at San Antonio
Jennifer Yin: University of Texas at San Antonio

Review of Quantitative Finance and Accounting, 2016, vol. 46, issue 3, No 7, 633-660

Abstract: Abstract Electric utilities face profit regulation tied explicitly to accounting data. Under existing rate structure, the utilities are required to provide periodic and specialized accounting reports for use in rate decisions. Consumer groups and opponents often criticize the rate structure alleging possible alteration of accounting reports by utilities to gain favorable regulation. Nonetheless, there is little empirical evidence supporting the allegation. This study investigates profit incentives for earnings management by utilities seeking rate increases. Specifically, this study investigates whether electric utilities proactively adopt profit-reducing actions before and during rate requests. The results are consistent with strategic use of accounting methods to reduce reported profits immediately before and during rate requests. The evidence supports the notion that utilities reduce profits just before and during rate reviews to relax regulatory constraints and improve profit opportunities.

Keywords: Electric utility; Earnings management; Profit incentive (search for similar items in EconPapers)
JEL-codes: L94 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11156-014-0481-1

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