Forthcoming Journal of Business Finance and Accounting

We explore to what extent firms deliberately manage their financial reports by ex-ploiting the flexibility of generally accepted accounting principles. Using a sample of Oslo Stock Exchange-listed firms with 20–50 % equity holdings in other firms, we find that firms with high financial leverage tend to maximize reported earnings from these investments through their choice between the cost method and the equity method, pos-sibly in an attempt to reduce debt renegotiation costs or to avoid regulatory attention. In contrast, managers do not systematically bias reported earnings to extract private benefits or to signal revised expectations about future cash flows. Firms use different earnings management tools in a consistent way, as the earnings effect of the cost/equity choice is not offset by discretionary accruals. JEL Classification: G38, K4, M41. Key Words: earnings management, cost method, equity method, associated firms, discretionary accruals. ∗We gratefully acknowledge valuable comments from an anonymous referee, Kate Campbell, Ray King