Are Corporate Risk-Taking Practices Indicative of Aggressive Reporting Practices?
Posted: 9 Dec 2007 Last revised: 29 Sep 2022
Date Written: February 15, 2017
We examine empirically if the manner of risk-taking in which firms engage is associated with aggressive reporting practices. Theoretical and anecdotal evidence suggests that firms face a tradeoff between risk-taking and managerial opportunism as they seek to produce higher returns. In the period before the Sarbanes-Oxley Act of 2002 (SOX), we find that firms with more risk-taking through external asset growth are more likely to engage in aggressive reporting, but the reverse is true for firms with a practice of risk-taking through organic growth. Consistent with evidence in prior research on the improved quality of financial reporting after SOX, the positive association between a practice of risk-taking through asset growth and aggressive reporting is attenuated in the post-SOX period.
Keywords: Aggressive reporting, tax avoidance, earnings management, corporate risk-taking
JEL Classification: M41, M43, M49, H25, G30, J33, G12
Suggested Citation: Suggested Citation