Management Deception, Big-Bath Accounting, and Information Asymmetry: Evidence from Linguistic Analysis
64 Pages Posted: 16 Jul 2017 Last revised: 27 Feb 2018
Date Written: February 26, 2018
Accounting big baths are pervasive in practice. While big baths can improve the information environment and reduce information asymmetry, they can also degrade the information environment and obscure operating performance. In this study, we examine the role of management ethics. Specifically, we investigate whether managers’ truthfulness (or conversely, deceptiveness) affects how investors perceive big baths. Using linguistic analysis on earnings-conference calls to measure managerial deception and employing a difference-in-differences research design with propensity-score matching, we find that information asymmetry is significantly higher following big baths taken by deceptive CEOs, compared with big baths taken by less deceptive CEOs.
Keywords: Management Deception, Big-Bath Accounting, Linguistic Analysis, Information Asymmetry
JEL Classification: G30, M10, M40, M41
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