Environmental crisis management and earnings strategy: two cases

This paper examines the accounting choice in a response to a major environmental crisis by looking at BP (British Petroleum) and Zijin Mining (a mining firm listed on Shanghai Stock Exchange, ZM hereafter), both of which face an environmental crisis at a similar level in 2010. The results show that BP may overly recognize crisis-related expenses in the year of crisis, suggesting that BP is likely to use the income-decreasing earnings management (e.g., big bath accounting etc.) as a response to the crisis. Then, BP partly reverses the expenses and pushes up reported earnings in the subsequent year. On the contrary, ZM's operating performance (sales growth & profitability) and stock performance seem to be superior subsequent to the crisis. Importantly, we find that the firm uses income-increasing accruals management to boost reported earnings. Further data investigation indicates that several specific accruals have been inflated in the year of crisis: i.e., provisions for asset impairment, accounts receivables and inventories. In addition, a few real earnings management items have been examined, but the findings are mixed.

Autorentext

Jia Hu has obtained her Bachelor's degree in Xi'an Jiaotong-Liverpool University (XJTLU) PR China in 2013. Her major is accounting and her research area is earnings management.Since then she has worked for the government. Dr. Peng Cheng is the supervisor of Jia Hu.