Download This PaperPeer Pressure in Corporate Earnings Management
78 Pages Posted: 6 Dec 2021
Date Written: September 20, 2018
Abstract
We show that peer firms play an important role in shaping corporate earnings management decisions. To overcome identification issues in isolating peer effects, we use an instrumental variables strategy based on two plausibly exogenous events: fund flow-induced selling pressure by passive open-end equity mutual funds and treatment status in a regulatory experiment conducted by the Securities and Exchange Commission (Regulation SHO). Managers respond to these events by adjusting earnings management policies. We then measure focal firms’ reactions to instrumented changes in earnings management at their peer firms. The documented peer effect in earnings management is not only statistically, but also economically significant. We find that peer effects arise because of herding within peer groups as well as out of compensation concerns.
Keywords: Peer effects, Earnings reporting, Mutual fund flows, Regulation SHO
JEL Classification: G32, L14, M41
Suggested Citation: Suggested Citation
Markus Schmid (Contact Author)
University of St. Gallen - Swiss Institute of Banking and Finance ( email )
Unterer Graben 21
St. Gallen, 9000
Switzerland
University of St. Gallen - School of Finance ( email )
Unterer Graben 21
St.Gallen, CH-9000
Switzerland
Swiss Finance Institute
c/o University of St. Gallen
Dufourstrassse 50
St. Gallen, SG 9000
Switzerland
European Corporate Governance Institute (ECGI) ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium