Natural Disaster Impedes the Corporate Earnings Management in the U.S.

24 Pages Posted: 7 Oct 2020 Last revised: 20 Oct 2020

See all articles by Kai Wu

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Huiming Zhang

Nanjing University of Information Science & Technology - School of Environmental Science and Engineering

Shouyang Wang

Chinese Academy of Sciences (CAS) - Center for Forecasting Science; Academy of Mathematics and Systems Sciences

Yueming Qiu

University of Maryland, College Park

Lianshui Li

Nanjing University of Information Science & Technology

Zijing Cao

Nanjing University of Information Science & Technology

Yi Zhou

Nanjing University of Information Science & Technology

Date Written: October 20, 2020

Abstract

Natural disasters can cause heavy economic losses to firms that may propel them to overuse earnings management to change public perceptions about the damage brought by these events. This may lead to potential profit manipulation and accounting fraud, eventually damaging the interests of shareholders and business sustainability. Although studies have examined both natural disasters and earnings management, little attention has been focused on understanding the association between them, and the possible mechanism through which natural disasters affect corporate earnings management behaviors. To fill this gap, we apply propensity score matching technique and differences-in-differences regression using a sample of 12,808 publicly listed firms over the 1980-2017 period in the U.S. We find that natural disasters restrain the extent of corporate earnings management by 8.2% (9.6%) annually in two (three) years following the event. The breakdown into five specific types of natural disasters shows that such effect is most pronounced for snow-related disasters, followed by hurricanes, fires, storms and floods in descending magnitude. Our study also demonstrates the maximal effect of natural disasters on corporate earnings management in low competitive product markets. We conclude with recommendation for differentiated regulation conditional on disaster types and market competitions.

Keywords: natural disaster; earnings management; PSM-DID model;external monitoring

JEL Classification: J23

Suggested Citation

Wu, Kai and Zhang, Huiming and Wang, Shouyang and Qiu, Yueming and Li, Lianshui and Cao, Zijing and Zhou, Yi, Natural Disaster Impedes the Corporate Earnings Management in the U.S. (October 20, 2020). Available at SSRN: https://ssrn.com/abstract=3676848 or http://dx.doi.org/10.2139/ssrn.3676848

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Huiming Zhang (Contact Author)

Nanjing University of Information Science & Technology - School of Environmental Science and Engineering ( email )

China

Shouyang Wang

Chinese Academy of Sciences (CAS) - Center for Forecasting Science; Academy of Mathematics and Systems Sciences ( email )

China

Yueming Qiu

University of Maryland, College Park ( email )

Lianshui Li

Nanjing University of Information Science & Technology

No.219, Ningliu Road
Nanjing, Jiangsu
China

Zijing Cao

Nanjing University of Information Science & Technology

No.219, Ningliu Road
Nanjing, Jiangsu
China

Yi Zhou

Nanjing University of Information Science & Technology ( email )

No.219, Ningliu Road
Nanjing, Jiangsu
China

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