Does litigation deter or encourage real earnings management
In this paper, we rely on an exogenous shock to examine the impact of litigation risk on real earnings management (REM). We conduct differences-in-differences tests centered on an unanticipated court ruling that reduced litigation risk for firms headquartered in the Ninth Circuit. REM increases sign...
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sg-smu-ink.soa_research-28592020-09-25T07:09:10Z Does litigation deter or encourage real earnings management HUANG, Sterling ROYCHOWDHURY, Sugata SLETTEN, Ewa In this paper, we rely on an exogenous shock to examine the impact of litigation risk on real earnings management (REM). We conduct differences-in-differences tests centered on an unanticipated court ruling that reduced litigation risk for firms headquartered in the Ninth Circuit. REM increases significantly following the ruling for Ninth-Circuit firms relative to other firms, consistent with litigation risk deterring REM. Additional analyses reveal that REM rises more following the ruling when firms issue more optimistic disclosures. The evidence is consistent with litigation deterring REM by constraining managers' ability to issue optimistic and misleading disclosures that can conceal the myopic and opportunistic motives underlying REM. We further document that an increase in REM in response to a decline in litigation risk is more pronounced when managers have higher incentives to manipulate earnings and governance mechanisms are weaker. 2020-05-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research/1832 info:doi/10.2308/accr-52589 https://ink.library.smu.edu.sg/context/soa_research/article/2859/viewcontent/Does_Litigation_Encourage_REM_2019_av.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University Real Earnings Management Earnings Management Deterrence Litigation Corporate Governance Misleading Disclosure Accounting Corporate Finance |
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Real Earnings Management Earnings Management Deterrence Litigation Corporate Governance Misleading Disclosure Accounting Corporate Finance HUANG, Sterling ROYCHOWDHURY, Sugata SLETTEN, Ewa Does litigation deter or encourage real earnings management |
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In this paper, we rely on an exogenous shock to examine the impact of litigation risk on real earnings management (REM). We conduct differences-in-differences tests centered on an unanticipated court ruling that reduced litigation risk for firms headquartered in the Ninth Circuit. REM increases significantly following the ruling for Ninth-Circuit firms relative to other firms, consistent with litigation risk deterring REM. Additional analyses reveal that REM rises more following the ruling when firms issue more optimistic disclosures. The evidence is consistent with litigation deterring REM by constraining managers' ability to issue optimistic and misleading disclosures that can conceal the myopic and opportunistic motives underlying REM. We further document that an increase in REM in response to a decline in litigation risk is more pronounced when managers have higher incentives to manipulate earnings and governance mechanisms are weaker. |
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HUANG, Sterling ROYCHOWDHURY, Sugata SLETTEN, Ewa |
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HUANG, Sterling ROYCHOWDHURY, Sugata SLETTEN, Ewa |
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HUANG, Sterling |
title |
Does litigation deter or encourage real earnings management |
title_short |
Does litigation deter or encourage real earnings management |
title_full |
Does litigation deter or encourage real earnings management |
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Does litigation deter or encourage real earnings management |
title_full_unstemmed |
Does litigation deter or encourage real earnings management |
title_sort |
does litigation deter or encourage real earnings management |
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Institutional Knowledge at Singapore Management University |
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2020 |
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https://ink.library.smu.edu.sg/soa_research/1832 https://ink.library.smu.edu.sg/context/soa_research/article/2859/viewcontent/Does_Litigation_Encourage_REM_2019_av.pdf |
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