Earnings Management to Minimize Superfund Clean†up and Transaction Costs*

Derek Johnston and Steve Rock

Contemporary Accounting Research, 2005, vol. 22, issue 3, 617-642

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.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:wly:coacre:v:22:y:2005:i:3:p:617-642

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