We introduce a novel Big Data analytics model to detect upward revenue misreporting. The model uses freely available Google searches of firm products to provide external entity business state (EBS) evidence. The veracity of the reported numbers is enhanced when auditors can obtain external EBS evidence congruent with the reported numbers. The Google search volume index (SVI) of firm products is a good candidate for such EBS evidence because it nowcasts (i.e. predicts present) firm sales and is independent of management control. A large discrepancy such as a high sales growth together with a large decline in the SVI suggests possible manipulation upwards of revenues. We find that an indicator variable, MUP, of a firm in the top sales growth quartile and bottom ΔSVI quartile in each industry-quarter predicts revenue misstatements incrementally to the F_Score, Discretionary-Revenues model, two alternative upward revenue manipulation identifiers, and analyst and media coverages. MUP predictability is stronger in end-user industries and in interim quarters relative to the fourth quarter. We also find corroborating evidence that MUP firms have lower sales growth persistence, larger increases in accounts receivables, and lower allowances for bad debts, consistent with their lower revenue quality.

ABSTRACT Limited attention theory predicts that higher salience of earnings news implies a stronger immediate market reaction to earnings news and a weaker post-earnings announcement drift (PEAD) or reversal (PEAR). Using a new measure, SALIENCE, defined as the number of quantitative items in an earnings press release headline, we find strong evidence consistent with salience effects. Higher SALIENCE is associated with stronger announcement reaction and subsequent PEAR. Managers are more likely to choose higher SALIENCE before selling shares in the post-announcement period and when earnings are high, but less persistent, and to choose lower SALIENCE before stock option grants. The results are robust to using residual salience and an extended set of control variables. The findings are consistent with managers opportunistically headlining positive financial information in the earnings press release to incite over-optimism in investors with limited attention.

ABSTRACT We investigate whether and when firms manage the tone of words in earnings press releases, and how investors react to tone management. We estimate abnormal positive tone, ABTONE, as a measure of tone management from residuals of a tone model that controls for firm quantitative fundamentals such as performance, risk, and complexity. We find that ABTONE predicts negative future earnings and cash flows, is positively associated with upward perception management events, such as, just meeting/beating thresholds, future earnings restatements, SEO, and M&A, and is negatively associated with a downward perception management event, stock option grants. ABTONE has a positive stock return effect at the earnings announcement and a delayed negative reaction in the one and two quarters afterward. Balance sheet constrained firms and older firms are more likely to employ tone management over accruals management. Overall, the evidence is consistent with managers using strategic tone management to mislead investors about firm fundamentals.