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US oil companies’ earnings management in response to hurricanes Katrina and Rita
Authors:Donal Byard  Mahmud Hossain  Santanu Mitra  
Institution:aStan Ross Department of Accountancy, CUNY-Baruch College, Zicklin School of Business, New York, NY 10010-5585, United States;bDepartment of Accounting, Fogelman College of Business and Economics, University of Memphis, Memphis, TN 38152-6312, United States;cDepartment of Accounting, School of Business Administration, Wayne State University, Detroit, MI 48202, United States
Abstract:This study examines earnings management by US-based oil companies in the period immediately after the impact of hurricanes Katrina and Rita. We show that large petroleum refining firms – but not the smaller crude oil and natural gas production companies – recorded significant abnormal income-decreasing accruals in the fiscal quarter immediately after the impact of hurricanes Katrina and Rita (Q4 of 2005). In addition, we show that these results are driven by abnormal current accruals. Prior studies show that some firms respond to periods of heightened political scrutiny by recording abnormal income-decreasing accruals (e.g. Cahan, S., 1992. The effect of antitrust investigation on discretionary accruals: a refined test of the political cost hypothesis. The Accounting Review 67 (1), 77–96; Han, J., Wang, S., 1998. Political costs and earnings management of oil companies during the 1990 Persian Gulf Crisis. The Accounting Review 73 (1), 103–118]). Our results add to this stream of research by examining a political cost-increasing event that occurred after the passage of the Sarbanes–Oxley Act (SOX) of 2002. The results suggest that in the post-SOX period managers continue to engage in income-decreasing earnings management during periods of heightened political cost sensitivity, at least in the case of large petroleum refining firms.
Keywords:Earnings management  Political costs hypothesis  Oil industry  Hurricane Katrina
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