Managing Earnings with Intercorporate Investments

Authors

  • Øyvind Bøhren,

    1. The authors are respectively from BI Norwegian School of Management and the Norwegian School of Economics and Business Administration.
    Search for more papers by this author
  • Jørgen Haug

    Corresponding author
    1. The authors are respectively from BI Norwegian School of Management and the Norwegian School of Economics and Business Administration.
    Search for more papers by this author

  • They gratefully acknowledge valuable comments from an anonymous referee, Kate Campbell, Ray King, John Christian Langli, Dag Michalsen, Hans Robert Schwencke, David C. Smith, Gary Sundem and Teresa Trapani. This research has received financial support from the Research Council of Norway.

* Address for correspondence:Øyvind Bøhren, Nydalsveien 37, N0442 Oslo, Norway. e-mail: oyvind.bohren@bi.no.

Abstract

Abstract:  We explore to what extent firms deliberately manage their financial reports by exploiting the flexibility of generally accepted accounting principles. Using a sample of Oslo Stock Exchange-listed firms with 20–50% equity holdings in other firms, we find that firms with high financial leverage tend to maximize reported earnings from these investments through their choice between the cost method and the equity method, possibly in an attempt to reduce debt renegotiation costs or to avoid regulatory attention. In contrast, managers do not systematically bias reported earnings to extract private benefits or to signal revised expectations about future cash flows. Firms use different earnings management tools in a consistent way, as the earnings effect of the cost/equity choice is not offset by discretionary accruals.

Ancillary