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

Posted: 9 Dec 2007 Last revised: 17 May 2017

See all articles by Mary Margaret Frank

Mary Margaret Frank

University of Virginia - Darden School of Business

Luann J. Lynch

University of Virginia - Darden School of Business

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Rong Zhao

University of Calgary

Date Written: February 15, 2017

Abstract

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

Frank, Mary Margaret and Lynch, Luann J. and Rego, Sonja O. and Zhao, Rong, Are Corporate Risk-Taking Practices Indicative of Aggressive Reporting Practices? (February 15, 2017). Journal of American Taxation Association, Forthcoming, Darden Business School Working Paper No. 1066846, Available at SSRN: https://ssrn.com/abstract=1066846 or http://dx.doi.org/10.2139/ssrn.1066846

Mary Margaret Frank (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4432 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/frank.htm

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

Rong Zhao

University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-2568 (Phone)
403-210-2217 (Fax)

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