Earnings management under price regulation: Empirical evidence from the Spanish electricity industry

This paper analyses the effect of price regulation on the accounting policy of Spanish electricity companies over the period 1991-2001. As predicted by the political costs hypothesis (Watts and Zimmerman, 1986) [Watts, R.L., Zimmerman, J.L. 1986. Positive accounting theory, Prentice Hall, Englewood Cliffs, NJ], managers artificially reduce reported earnings when the government establishes tariff increases. In this way, companies attempt to diminish their political visibility and counteract social outcry arising from the government's decision. Several abnormal accruals models existent in the literature are used to obtain a proxy for managerial accounting discretion on earnings.