Earnings Management in Firms with Data Security Breaches

2019 ◽  
Vol 33 (3) ◽  
pp. 267-284 ◽  
Author(s):  
Howard Xu ◽  
Savannah (Yuanyaun) Guo ◽  
Jacob Z. Haislip ◽  
Robert E. Pinsker
Keyword(s):  
Earnings Management ◽  
Data Security ◽  
Data Availability ◽  
Real Earnings Management ◽  
Matched Sample ◽  
Analyst Coverage ◽  
Subsequent Performance ◽  
Security Breaches ◽  
External Monitoring ◽  
The Cost

ABSTRACT Anecdotal research suggests that management is concerned about how Data Security Breaches (DSBs) impact a firm's financial performance. We investigate: whether managers in DSB firms manipulate earnings through real earnings management (REM) and/or accrual-based earnings management (AEM); how breach type, disclosure delay, and external monitoring impact earnings management activities; and how earnings management activities influence a DSB firm's performance. Using a propensity score matched sample, results suggest that DSB firms are more likely to manipulate earnings via REM, but not AEM. Additionally, we find that DSB firms engage in REM through cutting discretionary expenses, decreasing discretionary cash spending, and reducing the cost of goods sold through overproduction. We find some evidence that firms are more likely to increase REM when DSBs involve financial information or when firms delay the DSB disclosure or have low analyst coverage. We provide evidence that REM activities lead to lower subsequent performance in DSB firms. Data Availability: The data used are publicly available from the sources cited in the text.

scholarly journals Analyst Coverage and Earnings Management Using Classification Shifting

2018 ◽  
Vol 7 (3) ◽  
pp. 172
Author(s):  
Fang Zhao
Keyword(s):  
United States ◽  
Earnings Management ◽  
Financial Analysts ◽  
Positive Association ◽  
The United States ◽  
Real Earnings Management ◽  
International Studies ◽  
Analyst Coverage ◽  
External Monitoring ◽  
Classification Shifting

This study examines the association between analyst coverage and classification shifting. Prior studies on external monitoring factors and classification shifting provide mixed results: international studies (Haw, Ho, & Li, 2011; Behn, Gotti, Herrmann, & Kang, 2013) find that external monitoring factors mitigate classification shifting, while Abernathy, Beyer, and Rapley (2014) find that external monitoring factors promote classification shifting when accrual-based earnings management and real earnings management are constrained. Using a sample of firms in the United States, this study finds a positive association between classification shifting and an external monitoring factor: analyst coverage. This result suggests that when higher analyst coverage has stronger monitoring role on earnings management, managers are more likely to use classification shifting. The implication of this study should be of interest to financial analysts.

Clawbacks and Earnings Management

2018 ◽  
Vol 31 (3) ◽  
pp. 129-151 ◽  
Author(s):  
Carolyn B. Levine ◽  
Michael J. Smith
Keyword(s):  
Numerical Analysis ◽  
Earnings Management ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Interim Report ◽  
Short Term ◽  
Period Model ◽  
Jel Classifications

ABSTRACT This study addresses the effect of clawbacks on earnings management (EM). In a two-period model, the manager can report truthfully or distort an interim report using either accrual or real EM. The principal can make short-term payments based on a manipulable accounting signal and long-term payments based on unmanipulable cash flows. The strength of the clawbacks determines the likelihood that the manager's compensation is reclaimed when the interim report was managed. Stronger clawback provisions may result in (1) a substitution between accrual and real earnings management, or (2) earnings management when no earnings management was optimal with weak clawbacks, and (3) lower expected profits for the principal. Numerical analysis suggests that strong clawbacks do not reduce aggregate earnings management. JEL Classifications: J33; M48; M52; G38. Data Availability: All data are simulated.

Real earnings management and the cost of new corporate bonds

2014 ◽  
Vol 67 (4) ◽  
pp. 641-647 ◽  
Author(s):  
Wenxia Ge ◽  
Jeong-Bon Kim
Keyword(s):  
Earnings Management ◽  
Corporate Bonds ◽  
Real Earnings Management ◽  
The Cost

The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees

2016 ◽  
Vol 36 (1) ◽  
pp. 85-107 ◽  
Author(s):  
Adam Greiner ◽  
Mark J. Kohlbeck ◽  
Thomas J. Smith
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Audit Fees ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Increased Risk ◽  
Pricing Behavior ◽  
Reported Earnings ◽  
The Relationship

SUMMARY We examine the relationship between aggressive income-increasing real earnings management (REM) and current and future audit fees. Managers pursue REM activities to influence reported earnings and, as a consequence, alter cash flows and sacrifice firm value. We posit that the implications of REM are considered in auditors' assessments of engagement risk related to the client's economic condition and result in higher audit fees. We find that, with the exception of abnormal reductions in SG&A, aggressive income-increasing REM is positively associated with both current and future audit fees. Additional analyses provide evidence consistent with increased effort combined with increased risk contributing to the current pricing effect, with increased business risk primarily driving the future pricing effect. We, therefore, provide evidence that aggressive income-increasing REM activities have a significant influence on auditor pricing behavior, consistent with the audit framework associating engagement risk with audit fees. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.

scholarly journals Do Analysts Follow Managers Who Switch Companies? An Analysis of Relationships in the Capital Markets

2013 ◽  
Vol 89 (2) ◽  
pp. 451-482 ◽  
Author(s):  
Francois Brochet ◽  
Gregory S. Miller ◽  
Suraj Srinivasan
Keyword(s):  
Capital Markets ◽  
Data Availability ◽  
Professional Relationships ◽  
Matched Sample ◽  
Regulation Fair Disclosure ◽  
Analyst Coverage ◽  
Listed Firms ◽  
Fair Disclosure ◽  
Carry Over ◽  
Selective Disclosure

ABSTRACT We examine the importance of professional relationships developed between analysts and managers by investigating analyst coverage decisions in the context of CEO and CFO moves between publicly listed firms. We find that top executive moves from an origin firm to a destination firm trigger analysts following the origin firm to initiate coverage of the destination firm in 10 percent of our sample, which is significantly higher than in a matched sample. Analyst-manager “co-migration” is significantly stronger when both firms are within the same industry. Analysts who move with managers to the destination firm exhibit more intense and accurate coverage of the origin firm than they do in other firms and compared to other analysts covering the origin firm. The advantage no longer holds after the executive's departure, and most of the analysts' advantage does not carry over to the destination firm. However, the analysts do increase the overall market capitalization of firms in their coverage portfolio. Our results hold after Regulation Fair Disclosure, suggesting that these relationships are not based on selective disclosure. Overall, the evidence shows both the importance and limitations of professional relationships in capital markets. Data Availability: Data are publicly available from sources identified in the article.

The Impact of Religion on Financial Reporting Irregularities

2011 ◽  
Vol 87 (2) ◽  
pp. 645-673 ◽  
Author(s):  
Sean T. McGuire ◽  
Thomas C. Omer ◽  
Nathan Y. Sharp
Keyword(s):  
Social Norms ◽  
Earnings Management ◽  
Financial Reporting ◽  
Rural Areas ◽  
Positive Association ◽  
Data Availability ◽  
Real Earnings Management ◽  
Business Practices ◽  
Agency Conflicts ◽  
The Impact

ABSTRACT This study examines the impact of religion on financial reporting. We predict that firms in religious areas are less likely to engage in financial reporting irregularities because prior research links religiosity to reduced acceptance of unethical business practices. Our results suggest that firms headquartered in areas with strong religious social norms generally experience lower incidences of financial reporting irregularities. We also examine whether religiosity influences managers' methods of managing earnings. Although we find a negative association between religiosity and abnormal accruals, we find a positive association between religiosity and two measures of real earnings management, suggesting that managers in religious areas prefer real earnings management over accruals manipulation. We provide evidence that our results are not driven by firms headquartered in rural areas and conclude that religious social norms represent a mechanism for reducing costly agency conflicts, particularly when other external monitoring is low. Data Availability: Contact the authors.

Analyst Coverage and Real Earnings Management: Quasi-Experimental Evidence

2016 ◽  
Vol 51 (2) ◽  
pp. 589-627 ◽  
Author(s):  
Rustom M. Irani ◽  
David Oesch
Keyword(s):  
Earnings Management ◽  
Pressure Effects ◽  
Real Earnings Management ◽  
Short Term ◽  
Analyst Following ◽  
Analyst Coverage ◽  
Securities Analysts ◽  
Different Types ◽  
Quasi Experimental ◽  
Term Performance

AbstractWe study how securities analysts influence managers’ use of different types of earnings management. To isolate causality, we employ a quasi-experiment that exploits exogenous reductions in analyst following resulting from brokerage house mergers. We find that managers respond to the coverage loss by decreasing real earnings management while increasing accrual manipulation. These effects are significantly stronger among firms with less coverage and for firms close to the zero-earnings threshold. Our causal evidence suggests that managers use real earnings management to enhance short-term performance in response to analyst pressure, effects that are not uncovered when focusing solely on accrual-based methods.

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