Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

Key Words: 
restaurant industry, earnings manipulation, stock price 
INTRODUCTION 
A variety of accounting scandals in recent years has had a big impact on Wall Street and has led to a major 
legislation (i.e. Sarbanes-Oxley Act) that forces corporate officers to stand behind their financial statements. The 
most famous scandals involved companies like Enron and WorldCom, along with many others. A prescient article 
by Laderman (1998) in Business Week discusses the accounting “tricks” that are frequently used to boost earnings 
as well as the assisting roles of accountants and investment bankers. In fact, these kinds of earnings manipulation 
(EM) have become a wide spread practice (Chan, Jegadeesh, & Sougiannis, 2004) 
One can read any number of accounts about the Enron scandal and find a manic obsession with reported 
earnings and earnings growth. However, this obsession did not overlook managers of hospitality firms. One of the 
first major scandals involved Cendant Corporation in 1998 when it was revealed that the company showed $500 
million in fake revenue to meet earnings targets. Dalbor (2005) discusses how Boston Chicken forced its 
franchisees into borrowing money from corporate headquarters and subsequently booked the repayments as revenue 
in order to give the appearance of a rapidly growing brand. More recently, Krispy Kreme has had to restate earnings 
because corporate headquarters would sell equipment to franchisees that didn’t need it in order to boost revenue and 
earnings. These events led to the demise of Boston Chicken and a significant drop in the stock price of Krispy 
Kreme.
The previously mentioned examples cite cases of stocks being penalized after a formal announcement of 
EM by the company or the Securities and Exchange Commission (SEC). The question this research attempts to 
answer is: holding all else constant, does the market penalize or reward the restaurant industry for earnings 
manipulation? Additionally, if there is a penalty for manipulators in the form of a declining stock price, how much 
is this penalty? The significance of this research is that it provides insight for investors and academics alike about 
any potential connection in the lodging industry regarding the actions of managers and potential earnings 
manipulation. 

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