Managing Earnings to Appear Truthful: The Effect of Public Scrutiny on Exactly Meeting a Threshold

51 Pages Posted: 4 Nov 2020

See all articles by Jessen L. Hobson

Jessen L. Hobson

University of Illinois at Urbana-Champaign

Sebastian Stirnkorb

Erasmus University Rotterdam

Date Written: September 30, 2020

Abstract

The past two decades have not eliminated managers’ willingness to manage earnings to meet and beat earnings thresholds, but have increased investors’ skepticism of earnings that exactly meet those thresholds, providing perverse incentives to not meet earnings expectations exactly. Using a low-external-context experiment, we find that managers avoid exactly meeting a benchmark, even when they must alter true earnings and incur a monetary cost to do so. We manipulate the effect of intensified scrutiny of managers and find that when earnings exactly meet a benchmark, managers are more likely to misreport earnings when they report under high public scrutiny. This is particularly the case for managers who are sensitive to others’ perceptions (and thus low on the Dark Triad scale). Further, we show that this misreporting increases managers’ belief that the market will accept their reports, consistent with managers misreporting for self-presentational goals. Thus, we examine a new incentive to manage earnings: misreporting to appear truthful. These results help explain otherwise undetectable behavior around earnings benchmarks and are important as managers are increasingly scrutinized by critical media, activists, and political oversight bodies, and as they face skepticism via more intimate forms of disclosure and communication, such as social media.

Keywords: Experimental Economics, Earnings Management, Benchmarks, Financial Reporting, Public Scrutiny, Dark Triad

JEL Classification: C91, C92, G1, M41, M43

Suggested Citation

Hobson, Jessen L. and Stirnkorb, Sebastian, Managing Earnings to Appear Truthful: The Effect of Public Scrutiny on Exactly Meeting a Threshold (September 30, 2020). Available at SSRN: https://ssrn.com/abstract=3707447 or http://dx.doi.org/10.2139/ssrn.3707447

Jessen L. Hobson (Contact Author)

University of Illinois at Urbana-Champaign ( email )

4011 Business Instructional Facility
515 East Gregory Drive
Champaign, IL 61820
United States

Sebastian Stirnkorb

Erasmus University Rotterdam ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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