Does the Use of Financial Derivatives Affect Earnings Management Decisions?

Does the Use of Financial Derivatives Affect Earnings Management Decisions?
Author(s): Barton, Jan
Year: 2000
Paper Number: GBS-ACC-2000-001
Goizueta Department: Accounting

Abstract

I examine the effects of derivatives use on earnings management behavior. I develop a self-selection simultaneous-equations model that captures managers' incentives to use derivatives and manage discretionary accruals. Empirical results from estimating the model on 1994-1996 data for a sample of 304 Fortune 500 firms indicate that firms with larger derivatives portfolios have lower levels of discretionary accruals. Results also suggest that managers use discretionary accruals and derivatives as partial substitutes to smooth earnings so as to reduce agency costs, income taxes, and information asymmetry, and to increase personal wealth and utility.