ACCRUAL MANAGEMENT PATTERN OF ELECTRIC UTILITY FIRMS IN A DEREGULATED ENVIRONMENT

Abstract

The Energy Policy Act of 1992 has changed the economic and competitive environment of electric utility firms by deregulating the industry. Previous studies document that the value-relevance of earnings has increased and a firm’s risk characteristic has changed consequent on deregulation. In the present study, I examine whether the changing role of earnings in firm valuation and increase of risk in the deregulated time period have induced electricity firms to engage in more abnormal accrual adjustments to manage earnings in an effort to maintain or improve firm values in the market. Based on a time-series analysis of 81 investor-owned electric utility firms over 15 year period, I find evidence that the sample electricity firms, in general, have exercised greater accounting flexibility/discretion to manage abnormal accruals in the post-deregulation period compared to the regulation period. However, they use such discretion to make greater adjustments of income-decreasing current accruals, which is indicative of more conservative application of GAAP. I do not find any difference in the use of income-increasing abnormal accruals by the sample firms between the two time-periods. Hence, the study produces no evidence of increase in

opportunistic reporting behavior of electricity firms in response to the deregulation. Finally, I observe no significant difference in the adjustment of non-current accruals between the pre and post deregulation period.