Are Aggressive Reporting Practices Indicative of Risk-Taking Corporate Environments?

Abstract:     
We examine whether firms with aggressive financial and tax reporting also have greater risk-taking corporate environments. We use investing, financing and operating policies and measures of firm risk to assess a firm’s risk-taking environment. We separate our analyses into the periods before and after the Sarbanes-Oxley Act (SOX) because prior evidence suggests SOX affected reporting and risk-taking practices. Our results provide strong evidence that before SOX, firms with greater risk-taking environments also engaged in more aggressive reporting. Our results also suggest that SOX eliminated the positive association between corporate risk-taking environments and aggressive reporting. Results from shareholder valuation tests indicate that in the pre-SOX time period, shareholders valued aggressive reporting – but not corporate risk-taking – at a premium. However, the passage of SOX substantially altered how shareholders assess aggressive reporting and corporate risk-taking.

Number of Pages in PDF File: 53

Keywords: Corporate risk taking, corporate culture, aggressive reporting, tax avoidance, earnings management

JEL Classification: M41, M43, M49, H25, G30, J33, G12

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