Conflicting incentives for earnings management in regulated companies: A study of the United States airline industr

Previous accounting studies concerning regulation have assumed that all the firms in an industry have the same incentives for managing earnings. This study presents evidence which contradicts this assumption. Using an economic model derived from capture theory, this study attempts to explain why companies within one industry would try to influence regulators differently.;This study uses the airline industry and its regulatory body, the Civil Aeronautics Board (CAB), to investigate the above issues. The industry experienced record losses during the 1970--1971 period. In response, the CAB implemented various anticompetitive policies designed to bolster the sagging profits of the more established airlines. (Brown, 1987) This study predicts that the established airlines, which benefited from regulation, would manage earnings downward in 1970 to further strengthen their argument for anticompetitive regulatory policies. The charters, however, whose growth was hindered by regulation, would not have the same incentives as the established airlines. They are not predicted to significantly manage earnings in an attempt to influence the CAB.;This study also examines the airlines in a deregulated time period. The period surrounding 1980 was similar to that of 1970 for the airlines financially; however, the airline industry was now effectively deregulated. This similar but different scenario allows for stronger conclusions to be drawn about the earnings management found under regulation.;Tests of the hypotheses are conducted on a sample of the airlines operating in 1970 and 1980 using data collected primarily from CAB publications. Results are basically consistent with the hypotheses. The discretionary accruals of the more established airlines are found to be significantly more negative than the discretionary accruals of the charters in 1970. The discretionary accruals of the established airlines are found to be more negative in 1970 than surrounding time periods. However, contrary to the hypotheses, the discretionary accruals for the charters are more positive in 1970 than in surrounding time periods. During the 1980 time period, neither group of airlines used significantly different discretionary accruals.