Doing Good When Doing Well : Evidence on Real Earnings Management

We provide evidence on earnings management by exploiting temporary exogenous shocks to utility firms' sales in the form of annual weather variation. We find that sample firms' sales are highly sensitive to annual changes in average temperatures in the region where the firm operates, but this sensitivity disappears quickly moving down the income statement. We interpret this as indirect evidence of earnings management. In search of direct evidence, we study charitable giving decisions by sample firms and uncover a significant positive sensitivity of charitable spending to weather-driven demand shocks. Given the magnitude of this detected relation and the economic returns from charitable giving, this behavior appears to be driven by a desire to smooth earnings