Predicting Accounting Misconduct: The Role of Firm-Level Investor Optimism

75 Pages Posted: 25 Mar 2018 Last revised: 22 May 2018

See all articles by Shantaram P. Hegde

Shantaram P. Hegde

University of Connecticut - School of Business

Tingyu Zhou

Florida State University

Date Written: March 13, 2018

Abstract

Motivated by a large literature on how firm-specific resources (such as leadership and management skills, strategies, organizational capabilities and intellectual properties) drive firm performance, we propose and find that heterogeneity in investor optimism regarding firm-specific attributes plays a very important role in influencing the managerial propensity to manipulate financial statements. When firm-level investor optimism is moderate, the incidence of accounting misconduct increases, but it decreases when investors are highly optimistic. Further, market reaction to the announcement of financial restatements is more negative when investors held more optimistic firm-specific beliefs at the time of initial misstatement. These findings are robust to alternative firm-specific optimism measures linked to analysts, general investors and unsophisticated individual investors, controls for market-wide consumer sentiment unexplained by macroeconomic factors, economy-wide and industry-level optimism, potential selection bias and reverse causality. Our analysis highlights the importance of firm-level investor optimism in predicting, preventing and detecting accounting misconduct.

Keywords: Investor Optimism, Financial Reporting, Accounting Misconduct, Irregularity, Earnings Management, Market Reactions

JEL Classification: G10, G14, G34, G38

Suggested Citation

Hegde, Shantaram P. and Zhou, Tingyu, Predicting Accounting Misconduct: The Role of Firm-Level Investor Optimism (March 13, 2018). Journal of Business Ethics, Forthcoming; University of Connecticut School of Business Research Paper No. 18-17. Available at SSRN: https://ssrn.com/abstract=3146950

Shantaram P. Hegde

University of Connecticut - School of Business ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-5135 (Phone)

Tingyu Zhou (Contact Author)

Florida State University ( email )

821 Academic Way
Tallahassee, FL 32306
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
77
rank
295,153
Abstract Views
279
PlumX Metrics