| I examine whether there is a relation between managers' manipulation of accounting accruals and their use of financial derivative instruments and whether managers undertake these two activities for similar reasons.;Using data for 304 nonfinancial Fortune 500 firms obtained from 1994-1996 annual reports and proxy statements, I find that notional amounts of derivatives are positively associated with the magnitude of accrual manipulation and negatively associated with the direction of accrual manipulation. Results from simultaneous-equations self-selection regressions suggest that managers manipulate accounting accruals and use financial derivatives to reduce financial distress and debt-related costs, ensure the ability to exploit their firms' investment opportunities, reduce income taxes, and smooth income and cash flows. Further, managers appear to manipulate accruals to increase their bonuses and to use derivatives as a result of risk aversion. My results also show that the decisions to manipulate accruals and use derivatives are joint; thus, failing to control for firms' risk (earnings) management activities may result in substantial bias in studies explaining earnings (risk) management behavior. |
