Financial Reporting Discretion, Managerial Myopia, and Investment Efficiency

2021 ◽  
Author(s):  
Xu Jiang ◽  
Baohua Xin
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Private Information ◽  
Investment Decisions ◽  
Unintended Consequence ◽  
Investment Efficiency ◽  
Net Benefit ◽  
Financial Reports ◽  
Ex Post ◽  
Managerial Myopia

We explicitly model financial reporting discretion and earnings management in an investment setting where managers have incentives to behave myopically. We show that, when managers are sufficiently but not excessively myopic, granting them some discretion over the mandatory financial reports can lead to better investment decisions. This finding contrasts with the conventional argument that financial reporting discretion facilitates earnings management and exacerbates managerial myopia, leading to inefficient investments. Costly earnings management, while offering managers some ex post protection against bad luck by decreasing the incidence of low financial reports, reduces the expected net benefit of high financial reports ex-ante. Consequently, managers with negative private information find it too costly to mimic those with positive private information, facilitating separation of managers through efficient investment. Thus, curbing managerial myopia by removing or overly restricting earnings management may have the unintended consequence of impairing investment efficiency.

Financial Reporting, Auditing, Analyst Scrutiny, and Investment Efficiency

2021 ◽  
Author(s):  
Derek Chan ◽  
Nanqin Liu
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Financial Statement ◽  
Investment Efficiency ◽  
Strategic Interactions ◽  
Financial Reports ◽  
Audit Failure ◽  
Economic Framework ◽  
Ex Post ◽  
Ex Ante

This paper presents an economic framework to study strategic interactions along the analyst-auditor-owner disciplinary chain, in which the auditor examines the financial reports prepared by the owner, and the analyst uncovers financial misreporting as well as audit failure. We find that although analyst scrutiny ex post detects misreporting, it ex ante aggravates the owner's misreporting behavior and further impairs financial statement reliability if the legal penalties for the auditor and the owner are small. We also show how the effects of a regulation depend on its target's disciplinarian(s). Specifically, (i) although enhancing the auditor's legal liability always increases audit quality and financial statement reliability, it decreases investment efficiency if and only if the analyst is highly independent; and (ii) increasing the owner's misreporting penalty decreases investment efficiency if and only if either of (but not both) the regulations on the auditor and the analyst is strict.

scholarly journals Pengaruh Kualitas Laporan Keuangan Terhadap Efisiensi Investasi

2019 ◽  
Vol 28 (2) ◽  
pp. 828
Author(s):  
Gede Diatmika Putra ◽  
I Gst Ayu Eka Damayanthi
Keyword(s):  
Sampling Method ◽  
Stock Exchange ◽  
Investment Decisions ◽  
Investment Efficiency ◽  
Analysis Model ◽  
Financial Reports ◽  
Financial Report ◽  
Logistics Regression ◽  
Descriptive Statistical Analysis

The aim of this research is to determine how the quality of financial reports on underinvestment and overinvestment conditions are affected. The research was conducted on mining companies listed in the Indonesian Stock Exchange in 2017. The number of samples on this research is 38 companies. The method of data collection used is non-technical sampling method with purposisive sampling. The analysis of the data analysis used is descriptive statistical analysis, model feasibility, multi-logistics regression analysis, and Walid statistics test. The analysis found that the quality of financial reports is negative in underinvestment and overinvestment conditions. The company's high quality financial report would result in a decrease in company probants that experienced underinvestment conditions compared to the company's probability in normal investment conditions. The quality of good financial reports can improve monitoring function for shareholders in monitoring investment decisions made by managers to avoid overinvestment conditions.Keywords: Investment efficiency, unverinvestment, overinvestment, the quality of financial report.

Is Earnings Quality Associated with Corporate Social Responsibility?

2012 ◽  
Vol 87 (3) ◽  
pp. 761-796 ◽  
Author(s):  
Yongtae Kim ◽  
Myung Seok Park ◽  
Benson Wier
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Earnings Management ◽  
Financial Reporting ◽  
Data Availability ◽  
Socially Responsible ◽  
Financial Reports ◽  
Top Executives ◽  
Accruals Quality ◽  
Corporate Social

ABSTRACT This study examines whether socially responsible firms behave differently from other firms in their financial reporting. Specifically, we question whether firms that exhibit corporate social responsibility (CSR) also behave in a responsible manner to constrain earnings management, thereby delivering more transparent and reliable financial information to investors as compared to firms that do not meet the same social criteria. We find that socially responsible firms are less likely (1) to manage earnings through discretionary accruals, (2) to manipulate real operating activities, and (3) to be the subject of SEC investigations, as evidenced by Accounting and Auditing Enforcement Releases against top executives. Our results are robust to (1) controlling for various incentives for CSR and earnings management, (2) considering various CSR dimensions and components, and (3) using alternative proxies for CSR and accruals quality. To the extent that we control for the potential effects of reputation and financial performance, our findings suggest that ethical concerns are likely to drive managers to produce high-quality financial reports. Data Availability: Data used in this study are available from public sources identified in the study.

scholarly journals The Moderating Effect of Gender on Audit Committee Attributes and Earnings Management

2020 ◽  
Vol 7 (3) ◽  
pp. 48
Author(s):  
Usman Abbas
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Stock Exchange ◽  
Securities And Exchange Commission ◽  
Moderating Effect ◽  
Ex Post ◽  
Ex Post Facto ◽  
Regulatory Bodies ◽  
The Impact

There exist a number of studies that have been conducted on the influence of audit committee attributes on earnings management but no attention has been given to the moderating effect of gender on audit committee attributes and earnings management. The main objective of this study was to examine the moderating effect of gender on the impact of audit committee attributes on earnings management of listed Agricultural companies in Nigeria for a period of six years (2012-2017). The study used ex-post facto and correlational research designs. The population of the study was the five (5) Agricultural companies in Nigeria listed on the Nigerian Stock Exchange as of 31st December 2017 and all the companies were used as a sample of the study. The study used a panel of multiple regression techniques for data analysis. It was found that gender has a strong and significant influence on the impact of audit committee attributes on earnings management of listed Agricultural companies in Nigeria. It was recommended that the audit committee of companies in Nigeria should comprise of at least 40% of women. Regulatory bodies concerned in Nigeria like Securities and Exchange Commission, Nigerian Stock Exchange and Financial Reporting Council should clearly state the composition of audit committee members and increase the number to ten where women should form 40% of the members of the committee and a woman with financial knowledge should be made the chairperson of the committee since women have shown a significant level of commitment to their responsibilities and contribute in reducing earnings manipulation.

Impact of COVID-19 Pandemic on Earnings Management: An Evidence from Financial Reporting in European Firms

2021 ◽  
pp. 097215092110534
Author(s):  
Naima Lassoued ◽  
Imen Khanchel
Keyword(s):  
Earnings Management ◽  
Least Squares ◽  
Financial Reporting ◽  
Management Practices ◽  
Ordinary Least Squares ◽  
Economic Recovery ◽  
Financial Reports ◽  
Discretionary Accrual ◽  
Preceding Period ◽  
The Impact

The aim of this study is to determine the impact of COVID-19 pandemic on earnings management practices. Focusing on a sample of 2,031 firms listed in 15 European countries, the study uses three discretionary accrual metrics as a proxy for earnings management ( Dechow et al., 1995 ; Kothari et al., 2005 ; McNichols, 2002 ) models. To this end, ordinary least squares (OLS) regressions are applied to compare earnings management during the pre-pandemic period (2017q1–2019q4) and the pandemic period (2020q1–2020q4). The results indicate that the sample firms tend to manage earnings during the pandemic period than during the preceding period. This finding implies a reduced reliability of the financial reports during the COVID-19 pandemic. Further analysis provides evidence of significant income-increasing earnings management during 2020. This finding suggests that firms manage earnings upward by alleviating the level of reported losses to rebuild investor and stakeholder confidence needed to support the economic recovery.

Insiders’ Foreknowledge of Earnings Results and Rule 10b5-1 Sales Trades

2020 ◽  
pp. 0148558X2096464
Author(s):  
Yen-Jung Lee
Keyword(s):  
Earnings Management ◽  
Strong Evidence ◽  
Private Information ◽  
Unintended Consequence ◽  
Future Earnings ◽  
Earnings Information ◽  
Trade Performance ◽  
Before And After ◽  
Earnings Performance ◽  
Good Trade

This article investigates the source of 10b5-1 plan insiders’ superior trade performance. Specifically, this article examines whether insiders trade on their private information about the firm’s future earnings performance through 10b5-1 sell trades and the features of 10b5-1 plan trades that are exploited to achieve superior trade performance. I find strong evidence that insiders use 10b5-1 plans to sell stock before disappointing earnings results. However, there is no evidence of earnings management around 10b5-1 sales, consistent with insiders’ good trade timing deriving from their foreknowledge about unfavorable earnings news rather than their ability to influence the timing and recognition of earnings performance. Restricting the sample to insiders who trade both before and after the implementation of Rule 10b5-1, I find that these insiders traded aggressively on earnings information even in the pre-10b5-1 era, but then shifted aggressive trading into 10b5-1 plans after the availability of planned trading, implying an unintended consequence of Rule 10b5-1. Finally, I document that strategic 10b5-1 trades tend to be infrequent, irregularly timed, close to the plan initiation date, and executed during traditional earnings blackout periods, revealing problematic features within 10b5-1 plans.

scholarly journals Financial Reporting and Shareholders’ Crave for Investment in Nigerian Listed Companies: The Earnings Management Question

2020 ◽  
Vol 5 (3) ◽  
Author(s):  
Uwem Etim Uwah ◽  
Joseph O. Udoayang
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Stock Exchange ◽  
Empirical Studies ◽  
Relevant Literature ◽  
Secondary Data ◽  
Financial Reports ◽  
Audit Firms ◽  
Corporate Governance Practice ◽  
Financial Consultants

This study examined the extent to which earnings management could be a factor in the higher value of stock in the Nigerian capital market, thereby being an inducement to invest in companies listed in the Nigerian Stock Exchange. The contemporary viewpoint of financial consultants, firm of auditors and academicians about the subject matter was sought. Interviews were granted, in conjunction with secondary data from the Security and Exchange Commission and the Nigerian Stock Exchange. A comprehensive research design which was garnished by the use of content analysis of relevant literature and theories was adopted. The findings of previous empirical studies were corroborated in the analysis from discussions with accounting professionals in the academia and audit firms. It was concluded that most investments in quoted companies are made as a result of earnings management mechanisms inherent in financial reports. It was recommended that the Financial Reporting Council of Nigeria and every stakeholder should act to ensure that corporate governance practice is actually achieved for sound financial reporting practice.

scholarly journals Internal Control Weakness and Managerial Myopia: Evidence from SOX Section 404 Disclosures

2019 ◽  
Vol 8 (1) ◽  
pp. 71-83 ◽  
Author(s):  
Amy E. Ji
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Investment Decisions ◽  
Reporting Quality ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
Section 404 ◽  
Managerial Myopia ◽  
Internal Control Weaknesses ◽  
The Impact

Problem/ Relevance: Managerial myopia is an important issue of interests to academics, practitioners, and regulators as managers have been condemned for their obsession with short-term earnings and myopic investment decisions that sacrifice firms’ long term value for shareholders. This article contributes by examining whether the quality of firms’ internal controls over financial reporting (ICFR) is associated with managerial myopia. Research Objective/ Questions: The purpose of this study is to examine whether managers in firms reporting material internal control weaknesses (ICW) under Section 404 of the Sarbanes-Oxley Act (SOX) of 2002 engage in myopic behaviors more than those in firms without reporting ICW. Methodology: The study uses the logit regression model to investigate a sample obtained from Compustat for the period of 2005-2013. Major Findings: The study finds a positive association between internal control weaknesses reported by auditors under Section 404 of the SOX and managerial short-termism which is measured by the probability of cutting R&D expenses in the current year from the previous year. Implications: Whereas prior studies mostly examine the impact of internal controls on accounting quality, this study demonstrates the implication of internal controls beyond financial reporting quality by showing an association between internal control quality and managerial myopia. Future research may further investigate the association between firms’ financial reporting quality and managerial investment decisions.

A Rationale for Imperfect Reporting Standards

2021 ◽  
Author(s):  
Henry L. Friedman ◽  
John S. Hughes ◽  
Beatrice Michaeli
Keyword(s):  
Financial Reporting ◽  
Private Information ◽  
Voluntary Disclosure ◽  
Accounting Standards ◽  
Direct Costs ◽  
General Purpose ◽  
Mandatory Reporting ◽  
Comparative Statics ◽  
Voluntary Disclosures ◽  
Financial Reports

The aim of general purpose financial reporting is to provide information that is useful to investors, lenders, and other creditors. With this goal, regulators have tended to mandate increased disclosure. We show that increased mandatory disclosure can weaken a firm’s incentive to acquire and voluntarily disclose private information that is not amenable to inclusion in mandated reports. Specifically, we provide conditions under which a regulator, seeking to maximize the total amount of information provided to investors via both mandatory and voluntary disclosures, would mandate less informative and more conservative financial reports even in the absence of any direct costs of increasing informativeness. This result is robust to allowing the firm to make reports more informative and to imposing a nondisclosure cost or penalty on the firm. The results and comparative statics analysis contribute to our understanding of interactions between mandatory reporting and voluntary disclosure and demonstrate a novel benefit to setting accounting standards that mandate imperfectly informative reports. This paper was accepted by Suraj Srinivasan, accounting.

scholarly journals Frequent Financial Reporting and Managerial Myopia

2017 ◽  
Vol 93 (2) ◽  
pp. 249-275 ◽  
Author(s):  
Arthur G. Kraft ◽  
Rahul Vashishtha ◽  
Mohan Venkatachalam
Keyword(s):  
Financial Reporting ◽  
Investment Decisions ◽  
Management Behavior ◽  
Difference In Differences ◽  
Managerial Myopia ◽  
Annual Reporting ◽  
Reporting Frequency ◽  
Large Decline ◽  
Jel Classifications

ABSTRACT Using the transition of U.S. firms from annual reporting to semi-annual reporting and then to quarterly reporting over the period 1950–1970, we provide evidence on the effects of increased reporting frequency on firms' investment decisions. Estimates from difference-in-differences specifications indicate that increased reporting frequency is associated with an economically large decline in investments. Additional analyses reveal that the decline in investments is most consistent with frequent financial reporting inducing myopic management behavior. Our evidence informs the recent controversial debate about eliminating quarterly reporting for U.S. corporations. JEL Classifications: M40; M41; G30; G31.

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