Depreciation manipulation and its impact on firms' returns

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

Earnings management is typically achieved via discretionary accruals (such as depreciation). Dechow et al. (1996), Archibald (1972), and Peasnell et al. (2000) present results on the market reaction to depreciation manipulation that are inconsistent. They find either no reaction or a negative one. This study aims at settling this contradiction by using several different methods, in order to identify a possible manipulation, with a sample of S&P500 firms. Data suggests that firms are manipulating depreciation. Furthermore, an analysis of useful life of assets reveals that firms have been increasing it since the dot com bubble burst and that its value is larger in profitable firms. However, results of our event studies reveal that the market is not reacting to deprecation manipulation. Thus, it seems possible for firms to fool the markets via this specific manipulation.