Sleep Deprivation and Financial Misreporting

Abstract

We examine how managers’ sleep deprivation affects the likelihood of financial misreporting. Extant evidence in organizational behavior research suggests that sleep deprivation increases individuals’ unethical conduct in the workplace, presumably due to sleep deprivation-induced cognitive impairment decreasing their self-control. Contrastingly, a proposition in psychology research claims that deception is more cognitively demanding than truth-telling, implying that sleep deprivation may decrease unethical conduct that involves deception. Thus, the direction of the relationship between sleep deprivation and misreporting, an unethical conduct that requires significant deception,  is an open question. 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 long-term sleep deprivation, the likelihood of material intentional misreporting is significantly smaller than for firms headquartered on the other side. This relation is robust to 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 sleep deprivation decreases financial misreporting, and presumably, the effect due to deception avoidance dominates the effect due to diminished self-control. 

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

JEL Classification: G10; I10; M41: M43