Peer Pressure in Corporate Earnings Management

78 Pages Posted: 6 Dec 2021

See all articles by Constantin Charles

Constantin Charles

London School of Economics & Political Science (LSE) - Department of Finance

Felix von Meyerinck

University of Zurich - Department of Finance

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

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

Charles, Constantin and von Meyerinck, Felix and Schmid, Markus, Peer Pressure in Corporate Earnings Management (September 20, 2018). Available at SSRN: https://ssrn.com/abstract=3975224 or http://dx.doi.org/10.2139/ssrn.3975224

Constantin Charles

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Felix Von Meyerinck

University of Zurich - Department of Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

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

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