Earnings management and deregulation: The case of motor carriers

Abstract

This study investigates the discretionary accounting choices of federally-regulated interstate motor carriers during the period in the late 1970s when the U.S. government successfully deregulated the industry. We predict that motor carriers were likely to use income-decreasing earnings management to lessen the public perception of excessive industry profits and thus to avoid deregulation that during this period of heightened political cost.We test this hypothesis on a sample of publicly-traded, federally-regulated motor carriers using Dechow et al.’s (1995) accruals model, augmented as a fixed-effects model (Key, 1997; Han and Wang, 1998) with separate controls for performance (Kothari et al., 2005) and for measurement error caused by mergers, acquisitions and discontinued operations (Hansen, 1999; Collins and Hribar, 2002). We compare accruals during the political-cost deregulation period of 1975–1979 against benchmark periods before and after industry deregulation.For all benchmark periods, we find evidence that motor-carrier firms managed earnings to reduce reported income in the later years of the deregulation period. This is the period when federal efforts shifted from administrative decisions that eased entry barriers and derailed collusive price setting to legislative efforts to deregulate the industry. These findings add to our understanding of accounting choices that influence political processes.