fenggramlichgupta

fenggramlichgupta - Special purpose vehicles: Empirical...

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Special purpose vehicles: Empirical evidence on determinants and earnings management Mei Feng Katz Graduate School of Business, University of Pittsburgh E-mail: mfeng@katz.pitt.edu Phone: (412) 624-1347 Jeffrey D. Gramlich University of Southern Maine School of Business and Copenhagen Business School E-mail: gramlich@maine.edu Phone: (207) 228-8232 Sanjay Gupta W. P. Carey School of Business, Arizona State University and Copenhagen Business School E-mail: sanjay.gupta@asu.edu Phone: (480) 965-6618 This version: September 2006 The authors gratefully acknowledge John Graham, Andy Leone, Cathy Shakespeare, and The Corporate Library for sharing various data used in this study (the remainder of the data is obtained from publicly available sources). Helpful comments from Anwer Ahmed, Patty Dechow, Amy Dunbar, Harry Evans, Liming Guan, Emre Karaoglu, Jim Largay, Mary Lea McAnally, Sarah McVay, Lil Mills, Kaye Newberry, Tom Omer, John Phillips, Cathy Shakespeare, Marjorie Shelley, Anup Srivastava, Terry Shevlin, Tom Stober, Jake Thomas, Terry Warfield and Dan Weimer, and workshop participants at the University of Pittsburgh, Texas A&M University, University of Connecticut, the 2005 American Accounting Association annual meeting, and the 2006 Hong Kong University of Science and Technology Summer Accounting Symposium are gratefully appreciated.
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Special purpose vehicles: Empirical evidence on determinants and earnings management Abstract: This paper investigates the use, determinants and earnings effects of special purpose vehicles. Based on a new proxy of SPV use that can be applied to a broad cross- section of firms over time, we find a six-fold monotonic increase in SPV usage over the 11-year period from 1994 to 2004. Tobit regression results for the determinants of SPV use show that, controlling for the economic motivations, as well as firm size and industry membership, SPV use is increasing in financial accounting incentives but strong corporate governance tends to mitigate SPV use. Specifically, SPV use increases with closeness to debt covenants and CEO’s bonus, and SPV use is significantly higher among firms with greater need for funds and higher marginal tax rates. Finally, the evidence is consistent with SPVs arranged for financial reporting purposes playing a role in managing accruals and earnings upwards, whereas the same does not appear to be the case for SPVs set up mainly for economic reasons.
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1 Special purpose vehicles: Empirical evidence on determinants and earnings management I. INTRODUCTION Off-balance sheet entities, variously referred to as special purpose entities, variable interest entities, or special purpose vehicles (henceforth referred to as “SPVs”) have attracted considerable attention from policymakers and regulators following some spectacular corporate scandals involving their use. Yet, not much is known about the prevalence of SPE use or the importance of different motivations associated with their use. In addition, despite concerns expressed about SPVs’ role in managing firms’ earnings, not much is known as prior research has mostly focused on the balance sheet implications.
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fenggramlichgupta - Special purpose vehicles: Empirical...

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