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Earnings Management by Oil Companies in Response to High Political Cost in the Post Hurricanes Katrina and Rita Period
Donal Byard,
Baruch College -- CUNY
Mahmud Hossain, University of Memphis
Santanu Mitra, Wayne State University
ABSTRACT. This study contributes to the extant literature on political cost hypothesis in context of Hurricane Katrina and Hurricane Rita by examining whether firms affected by unusual oil price increase aftermath these two hurricanes managed accounting earnings to mitigate political pressure. We analyze two sets of firms separately - petroleum refining firms (SIC 2911) and crude oil and firms (SIC 1311). We find that the sample petroleum refining firms made downward earnings adjustments in the period after Hurricane Katrina and Hurricane Rita hit the gulf coast region. However, our empirical results indicate that the sample crude oil firms did not make any sort of earnings management to minimize their political costs. Overall, the results support the “political cost hypothesis” by demonstrating that firms facing high political pressure caused by unusual increase in product price attempt to decrease their reported earnings to minimize the political costs.
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