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The earnings management opportunity for US oil and gas firms during the 2011 Arab Spring event

Daniel F. Hsiao (Department of Accounting, University of Minnesota Duluth, Duluth, Minnesota, United States.)
Yan Hu (Department of Applied Business Sciences & Economics, University of La Verne, La Verne, California, United States.)
Jerry W. Lin (Kate Tiedemann College of Business, University of South Florida at St. Petersburg, St. Petersburg, Florida, United States.)

Pacific Accounting Review

ISSN: 0114-0582

Article publication date: 1 February 2016

955

Abstract

Purpose

This study aims to examine whether US oil and gas companies engaged in earnings management during the 2011 Arab Spring, which resulted in significant increases in both crude oil and gasoline prices.

Design/methodology/approach

Following a similar research methodology from prior research, this study tests the existence of earnings management based on discretionary total accruals, current accruals and non-current accruals to determine whether both large petroleum refining firms and relatively small oil and gas-producing firms, jointly and separately, lowered reported earnings.

Findings

The results show that, overall, US oil and gas companies as a group engaged in income-decreasing earnings management during the Arab Spring. The results seem to support the political cost hypothesis. However, further analyses indicate that the results are driven by abnormal income-decreasing accruals of the relatively small oil and gas-producing firms, which are politically less sensitive.

Research limitations/implications

The findings suggest that there may be other non-political cost incentives, such as income smoothing, for the relatively small oil and gas-producing firms managing earnings downward during periods of large oil price increases. However, the possibility for firms with reversals of income-increasing activity from other quarters is not ruled out.

Originality/value

This study not only is the first empirical study of earnings management by oil and gas companies during the Arab Spring, but also contributes to extant earnings management literature regarding political cost hypothesis, which still remains a major concern for US oil and gas companies.

Keywords

Citation

Hsiao, D.F., Hu, Y. and Lin, J.W. (2016), "The earnings management opportunity for US oil and gas firms during the 2011 Arab Spring event", Pacific Accounting Review, Vol. 28 No. 1, pp. 71-91. https://doi.org/10.1108/PAR-03-2014-0013

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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