Title: | Warranty Reserve: Contingent Liability, Strategic Signal, or Earnings Management Tool |
Authors: | Cohen, Daniel Darrough, Masako Huang, Rong Zach, Tzachi |
Issue Date: | Nov-2007 |
Series/Report no.: | Daniel A. Cohen-15 |
Abstract: | Utilizing a database that recently became available due to the requirements of FIN 45, we examine the information content of accounting disclosures on warranties from two perspectives. First, since a warranty policy is a business strategy through which firms choose to promote their products, a warranty reserve serves two roles: a signal of product quality as well as a contingent liability to be honored in the future. Consistent with this view, we find that the stock market recognizes the warranty reserve as both a signal of firms’ future performance as well as a liability. Second, since warranty accruals require estimation of future claims, any discretion in this context can also be used as a tool of earnings management. Consistent with this expectation, our evidence indicates that managers use warranty accruals to manage earnings opportunistically to meet their earnings targets. |
URI: | http://hdl.handle.net/2451/27560 |
Appears in Collections: | Accounting Working Papers |
Files in This Item:
File | Description | Size | Format | |
---|---|---|---|---|
SSRN-id1087808.pdf | 924.52 kB | Adobe PDF | View/Open |
Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.