Welcome to the Gray Zone: Shades of Honesty and Financial Misreporting

85 Pages Posted: 13 Oct 2018 Last revised: 9 Dec 2018

See all articles by Pascale Lapointe‐Antunes

Pascale Lapointe‐Antunes

Brock University - Faculty of Business

Kevin J. Veenstra

McMaster University - DeGroote School of Business

Kareen Brown

Brock University - Goodman School of Business

Heather Li

Nanyang Business School

Date Written: December 8, 2018

Abstract

We examine the influence of CFO/CEO honesty perceptions on earnings management for the largest publicly traded companies in America, and show that verbal and visual cues play a significant role. Specifically, after controlling for incentives (i.e. stock-based compensation, bonuses, leverage) and opportunities (i.e. auditor independence, internal control deficiencies), members of senior management perceived to be less honest engage in higher levels of both accruals management and real earnings management. Interestingly, the beneficial impact of perceived honesty on earnings quality is most pronounced when both the CFO and the CEO are perceived to be honest. Findings are consistent with our conjecture that both the CFO and CEO independently contribute to a firm’s reporting environment. The role played by visual cues in assessing perceived honesty is complementary to the role played by verbal cues, which are revealed more slowly over an executive's tenure.

Keywords: Fraud triangle, rationalization, earnings management, textual analysis, visual cues

JEL Classification: M12, M14, M41

Suggested Citation

Lapointe-Antunes, Pascale and Veenstra, Kevin J. and Brown, Kareen and Li, Heather, Welcome to the Gray Zone: Shades of Honesty and Financial Misreporting (December 8, 2018). Available at SSRN: https://ssrn.com/abstract=3260712 or http://dx.doi.org/10.2139/ssrn.3260712

Pascale Lapointe-Antunes

Brock University - Faculty of Business ( email )

St. Catharines, Ontario L2S 3A1
Canada
905-688-5550, 5251 (Phone)
905-688-9779 (Fax)

HOME PAGE: http://www.bus.brocku.ca/faculty/faculty.php?id=139&d=Accounting

Kevin J. Veenstra (Contact Author)

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Kareen Brown

Brock University - Goodman School of Business ( email )

500 Glenridge Avenue
International Business and Strategy
St. Catherine's, Ontario L2S 3A1
Canada

Heather Li

Nanyang Business School ( email )

Singapore, 639798
Singapore

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