Managers’ Cognitive Fatigue and Financial Misreporting

47 Pages Posted: 12 Mar 2022 Last revised: 29 Feb 2024

See all articles by Ashiq Ali

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management

Zhongwen Fan

City University of Hong Kong (CityU)

Kai Wai Hui

University of Hong Kong

Siman Li

Xiamen University - Accounting Department

Date Written: February 29, 2024

Abstract

This study examines the effect of managers’ cognitive fatigue on their financial misreporting decisions. We predict that cognitive fatigue decreases misreporting by managers, because misreporting is cognitively more demanding than truthful reporting. Using a regression discontinuity design, we find that for firms headquartered on the late sunset side of U.S. time-zone boundaries, where managers are more likely to experience cognitive fatigue due to significant long-term sleep deprivation as evidenced in health studies, the likelihood of material intentional misreporting is significantly smaller than for firms headquartered on the other side. This relation is robust to using alternative specifications, including controlling for firm and CEO fixed effects, and is more pronounced for firms with lower institutional ownership concentration, a proxy for managers’ discretion to misreport. These results suggest that managers’ cognitive fatigue is an important determinant of financial misreporting.

Keywords: Financial misreporting; cognitive fatigue; sleep deprivation; sunset time

JEL Classification: G10; I10; M41: M43

Suggested Citation

Ali, Ashiq and Fan, Zhongwen and Hui, Kai Wai and Li, Siman, Managers’ Cognitive Fatigue and Financial Misreporting (February 29, 2024). Available at SSRN: https://ssrn.com/abstract=4007808

Ashiq Ali (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Road, SM41
Richardson, TX 75080-3021
United States
972-883-6360 (Phone)
972-883-6811 (Fax)

HOME PAGE: http://https://jindal.utdallas.edu/faculty/ashiq-ali

Zhongwen Fan

City University of Hong Kong (CityU) ( email )

Kai Wai Hui

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Siman Li

Xiamen University - Accounting Department ( email )

Xiamen, Fujian 361005
China

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