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Does Earnings Management Relieve the Negative Effects of Mandatory Pension Contributions?
Author(s) -
Phan Hieu V.,
Khieu Hinh D.,
Golec Joseph
Publication year - 2016
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12139
Subject(s) - earnings , market liquidity , pension , earnings management , business , monetary economics , cash flow , cash , finance , economics
Mandatory pension contributions (MCs) are negative shocks to a firm's liquidity that can unfavorably impact its cost of capital, financing, and investment plans. We examine whether firms faced with MCs use both noncash (NEM) and cash‐generating earnings management (CEM) to partially offset their negative effects. Firms increase CEM, but not NEM, when they experience MCs. We also find that earnings management associated with MCs does not substantially lower the weighted cost of capital or boost external funding and investment. Our findings suggest that MC firms use CEM as it directly generates cash to fund MCs, while NEM does not.