RATE-REGULATED ENTERPRISES AND MANDATED ACCOUNTING CHANGES - THE CASEOF ELECTRIC UTILITIES AND POST-RETIREMENT BENEFITS OTHER THAN PENSIONS (SFAS-NO.-106)

This paper investigates the reporting and contracting responses of ele ctric utilities to SFAS No. 106. Expense-increasing accounting standar ds generally have no direct cash flow consequences for nonregulated fi rms, but they reduce these firms' reported net income and increase the ir reported liabilities. Past research documents that managers of nonr egulated firms seek to avert potential contracting costs associated wi th such mandated accounting changes through operating, financing or re porting decisions that mitigate the financial statement impact of the accounting change. In contrast, expense-increasing accounting standard s do not usually affect rate-regulated firms' net income, but do have a positive effect on their cash flows because the rate recovery mechan ism is based on accounting numbers. Managers of rate-regulated firms t herefore have incentives to respond to expense-increasing accounting s tandards in ways that enhance the financial statement impact of the ac counting change. This study documents that managers of rate-regulated firms that face greater uncertainties about future rate recoveries hav e greater incentives to use discretionary choices that intensify the i mpact of expense-increasing accounting changes on current financial st atements.