Managerial Response to Non-Fundamental Price Shocks

43 Pages Posted: 30 Aug 2017 Last revised: 5 Nov 2017

See all articles by John C. Heater

John C. Heater

Duke University - Fuqua School of Business

Yukun Liu

Yale University, Department of Economics, Students

Ben Matthies

Yale University, School of Management, Students

Date Written: October 30, 2017

Abstract

We find that managers significantly alter their behavior in response to non-fundamental declines in price. In particular, after an exogenous, non-fundamental price drop, managers increase their disclosure quality, and shift accrual earnings management to real earnings management. Moreover, managers with high equity incentives engage more in real earnings management, while managers at firms with high litigation risk tend to increase their disclosure quality and decrease accrual earnings management. We confirm that the net effect of earnings management, in response to non-fundamental price shocks, results in firms more frequently reporting "suspicious" earnings. Firms that experience large non-fundamental price declines are more likely, on average, to meet or beat analysts’ earnings expectations by 1 or 2 cents in our sample. Our findings suggest that non-fundamental price variation is an important driver of firm disclosure policy and earnings management.

Keywords: CEO Incentives, Managerial Behavior, Earnings Management, Disclosure, Financial Reporting

JEL Classification: G32, M41, M52

Suggested Citation

Heater, John C. and Liu, Yukun and Matthies, Ben, Managerial Response to Non-Fundamental Price Shocks (October 30, 2017). Available at SSRN: https://ssrn.com/abstract=3029520 or http://dx.doi.org/10.2139/ssrn.3029520

John C. Heater (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1085 (Phone)

HOME PAGE: http://www.johnheater.com

Yukun Liu

Yale University, Department of Economics, Students ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Ben Matthies

Yale University, School of Management, Students ( email )

New Haven, CT
United States
8606175089 (Phone)

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