Using the staggered adoption of takeover laws, this study examines implications of takeover threats on earnings management around the world. I find that the enactment of takeover legislation leads to increased earnings management (abnormally high accruals, target beating, and poor accruals quality). Results are driven by underperforming managers with higher turnover risk in countries with high increases in turnover sensitivity to performance, indicating job security concerns as the channel through which takeover laws increase earnings management. Furthermore, results are strongest in countries with weak investor protection, where existing governance mechanisms are weaker and earnings management is more prevalent. Moreover, regulation provisions that most directly increase takeover threats experience greater earnings management responses. Additionally, I show that accounting restatements and fraud scandals become more frequent following takeover legislation. Overall, I provide evidence that takeover reforms, although enhancing discipline of underperforming managers, inadvertently incentivize accounting manipulation due to heightened job security concerns

We explore the impact of overlapping institutional ownership (OIO) within supply chains on the earnings management practices of supplier firms. Utilizing a dataset of U.S. publicly traded supplier firms from 1988 to 2016, we discover that suppliers with institutional ownership overlapping with their major customers exhibit reduced levels of discretionary accruals. This finding implies that such overlap discourages suppliers from engaging in upward earnings management through the manipulation of discretionary accruals. We also find that OIO curtails accrual-based earnings management by enhancing the relationship between supply chain partners and bolstering external monitoring. Additionally, we find that OIO also mitigates the extent of real earnings management undertaken by the supplier firm. These findings remain robust after addressing potential endogeneity concerns. Our results underscore the significant role of OIO within supply chains in curbing both accrual-based and real earnings management by supplier firms

We examine whether the design of a firm’s internal management accounting system is associated with GAAP earnings management. We exploit the fact that ASC 280 mandates a “management approach” requiring multisegment firms to disclose their segment earnings as defined internally by their management accounting system. We posit that the less these segment earnings are decoupled from GAAP earnings, the higher are the costs of earnings management because earnings management spills over to segment earnings and distorts information used for internal decision-making. Thus, we predict that firms with more decoupled segment earnings engage in more earnings management. Using a large sample of U.S. firms from 1998 to 2020, we find support for this prediction. We also find that the decision usefulness of segment earnings for segment investment purposes decreases as earnings management increases, with this association being more pronounced for firms with less decoupled segment earnings measures. Data Availability: Data are available from the public sources cited in the text

We investigate the impact of dividend policy on earnings quality and opportunistic earnings management for individual banks across 45 developed and developing countries between 1996 and 2019. Our estimates show that high dividend payments reduce earnings management, hence mitigate agency problems. This mitigation is especially prevalent among well-capitalised and non-listed banks. Greater investor protection and government regulation appear to strengthen the negative association between dividend policy and earnings management. Our results hold robustly across many different specifications

Given that tax‐related critical audit matters (tax CAMs) were prevalent among accelerated filers (18.5% of observations) during the initial year of CAM disclosures, we examine whether an auditor's disclosure of tax CAMs is associated with variation in tax‐related financial reporting quality, tax avoidance, and tax‐related earnings management. Finding an association between tax CAMs and one of these tax outcomes would indicate that the new auditor reporting standard has indirectly affected investors. Examining the first year of CAM disclosures, we do not find that tax CAMs are associated with broad proxies of tax‐related audit or financial reporting quality (e.g., restatements, internal control weaknesses, comment letters) or tax avoidance (e.g., effective tax rates or book‐to‐tax differences). We do find that tax CAMs are associated with a modest increase in tax accrual quality, an increase in the reserve for unrecognized tax benefits, and a reduction in the likelihood of tax‐related earnings management. However, we do not find these tax CAM effects persist into the second year of CAM reporting. Our evidence is consistent with tax CAM disclosures having a modest but short‐lived effect on companies' reporting of tax accounts. Our findings should inform the PCAOB as they conduct their post‐implementation review of the new audit reporting standard

We examine the effects of mandating compensation disclosure on executive incentive contracts, earnings management, firm value, and social welfare. We develop a moral hazard model with multiple principal-agent pairs facing an external monitor who allocates resources across firms to verify earnings management. With such scrutiny allocation, contracts exhibit externalities that create a coordination problem among principals. Contract disclosure enables principals to design the contract anticipating the monitor’s reaction. However, it may also exacerbate the coordination problem among principals because they do not consider externalities on other principals caused by the effects of their contract choices on the monitor’s scrutiny allocation. If internal controls are relatively weak, contract disclosure may make contracts more strongly contingent on reported earnings, increase earnings manipulation, and nevertheless increase social welfare. Contract disclosure improves firm value only if the scrutiny resources available to the monitor are not strongly constrained

We present evidence that clawback adoptions, by dissuading accruals management, motivate managers to shift capital investment mix from R&D to capex to preserve earnings-based compensation, thereby lowering capital investment efficiency. These effects are more pronounced for firms prone to financial misreporting, which is consistent with board incentives to adopt clawbacks, and with managerial incentives to substitute real for accruals-based earnings management to preserve performance-based compensation. Path analyses lend support to performance-based compensation serving as a channel through which clawback adoptions influence capital investment mix and efficiency. These findings extend and reinterpret prior findings and are timely given the Security and Exchange Commission's newly issued Rule 10D-1 that makes clawback provision adoptions a condition for U.S. exchange listings and explicitly requested “comment on any effect the proposed requirements may have on efficiency, competition, and capital formation

Prior research shows that contingent liabilities do not accurately predict future cash payments due to the managerial discretion afforded by accounting standards. We examine the extent to which current accounting guidance for a material contingent liability—the reserve for unrecognized tax benefits (UTBs) under Financial Interpretation No. 48 (FIN 48)—generates accruals that are predictive of future income tax cash outflows. We document that UTBs fully unwind as cash tax payments over the subsequent 5 years, suggesting that managers, on average, accurately incorporate their expectations of future tax liabilities. This result persists for firms that are (1) most affected by the implementation of FIN 48, (2) unable to impound detection risk into their reserves, (3) engaged in relatively more ex ante tax avoidance, (4) suspected to have engaged in earnings management through the tax accounts, and (5) subject to plausibly exogenous shocks to tax reporting. Overall, our results suggest that current accounting guidance under FIN 48 for contingent tax liabilities enables managers to accurately report, and financial statement users to reliably predict, future cash obligations

Joining the debate on the banking sector's impact on the real economy, this study examines the impact of banks' market power on local businesses' financial reporting quality. Based on the market power hypothesis and the information-based hypothesis, we propose four ways the banking market could affect the financial reporting quality. The proposed mechanisms suggest that borrowers and bank lenders face increased market power by implementing different earnings management and monitoring practices. Our documentary evidence suggests that since the banking market deregulation, restrictions on inter- and intra-state banking and branching have been removed, with banks gaining more power and the market becoming more consolidated. Using a large sample of U.S. listed firms from 1995 to 2019, we find a favourable impact of bank market power on corporate financial reporting quality, primarily driven by heightened monitoring by banks with greater market power, supporting the monitoring-stringent conjecture. In addition, this positive relationship is more pronounced among firms heavily reliant on local banks. Our results are robust to a rich set of tests, such as using alternative measurements for financial reporting quality and bank market power, including macroeconomic factors, and considering drastic changes in the bank market structure. We also address the endogeneity concerns and test the robustness of our key findings in a loan syndication setting. Our research suggests that facing increased bank market concentration and power, firms must pay additional attention to their financial reporting, which is widely used to access external finance