Political Costs, Environmental Disclosure and Earnings Management: An Examination of the Impact of Catastrophic Events on Intra-Industry Management Actions

Posted: 20 Aug 2001

Date Written: Undated

Abstract

This study examines two aspects of earnings management. First, we examine the association between the threat of increased regulatory costs and earnings management whereby corporations attempt to reduce their exposure to increased regulation by reducing reported income. Second, we examine the relation between the level of pre-event environmental disclosure and the extent of earnings management in response to regulatory threat. These issues are examined within the context of the earnings management response by chemical firms following the December, 1984 chemical leak at Union Carbide's Bhopal, India plant. The analysis finds that a sample of 40 U.S. chemical firms exhibited significant negative discretionary accruals for 1984. Furthermore, companies with higher levels of pre-event environmental disclosures in their 10K reports tended to take less negative discretionary accruals. These results are consistent with arguments suggesting corporate management uses environmental disclosure as a tool to reduce the likelihood of public policy actions being taken against the firm.

JEL Classification: M41, M43, K22

Suggested Citation

Patten, Dennis M. and Trompeter, Gregory M., Political Costs, Environmental Disclosure and Earnings Management: An Examination of the Impact of Catastrophic Events on Intra-Industry Management Actions (Undated). Available at SSRN: https://ssrn.com/abstract=273277

Dennis M. Patten

Illinois State University ( email )

Department of Accounting
Normal, IL USA 61761
309-438-7857 (Phone)

Gregory M. Trompeter (Contact Author)

Boston College ( email )

Carroll School of Management 140 Commonwealth Avenue
Chestnut Hill, MA 02167
United States
617-552-0878 (Phone)
617-552-2097 (Fax)

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