Earnings Management During Import Relief Investigations

The results of empirical tests support the earnings management hypothesis, suggesting that managers make income-decreasing accruals during import relief investigations by the US International Trade Commission (ITC). Discretionary accruals are more income-decreasing during the year the ITC completed its investigation than would otherwise be expected. Tests of the earnings management hypothesis are based on firm-specific expectations models used to estimate normal total accruals. These models allow for changes in nondiscretionary accruals that are caused by changes in economic conditions. The expectations models developed represent an attempt to improve on the measures of discretionary total accruals used in prior research; specifically, time-series models are developed to estimate total nondiscretionary accruals, and cross-sectional tests of the earnings management hypothesis are applied to the resulting discretionary accruals measure.