1 Coming Forward: Institutional Influences on Voluntary Disclosure (original) (raw)
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Organization Science, 2008
W e investigate the effects of social and regulatory forces on a firm's decision to disclose past wrongdoing by voluntarily restating its earnings. With an eight-year sample of more than 2,500 public firms, including 170 voluntary restaters, we find that firms are more likely to voluntarily restate their earnings in response to informal social pressures from other firms in their industry and less likely to do so in response to formal regulatory sanctions. We also show that the impact of these forces varies with firm status. We contribute to corporate governance and public policy research that examines the effectiveness of "hard" versus "soft" deterrence measures on firm compliance.
How Firms Respond to Mandatory Information Disclosure
Mandatory information disclosure regulations seek to create institutional pressure to spur performance improvement. By examining how organizational characteristics moderate establishments' responses to a prominent environmental information disclosure program, we provide among the first empirical evidence characterizing heterogeneous responses by those mandated to disclose information. We find particularly rapid improvement among establishments located close to their headquarters and among establishments with proximate siblings, especially when the proximate siblings are in the same industry. Large establishments improve more slowly than small establishments in sparse regions, but both groups improve similarly in dense regions, suggesting that density mitigates the power of large establishments to resist institutional pressures. Finally, privately held firms' establishments outperform those owned by public firms. We highlight implications for institutional theory, managers, and policymakers.
Turning Themselves In: Why Companies Disclose Regulatory Violations
SSRN Electronic Journal, 2005
As part of a recent trend toward more cooperative relations between regulators and industry, novel government programs are encouraging firms to monitor their own regulatory compliance and voluntarily report their own violations. In this study, we examine how enforcement activities, statutory protections, community pressure, and organizational characteristics influence organizations' decisions to self-police. We created a comprehensive dataset for the "Audit Policy", a United States Environmental Protection Agency program that encourages companies to selfdisclose violations of environmental laws and regulations in exchange for reduced sanctions. We find that facilities were more likely to self-disclose if they were recently inspected or subjected to an enforcement action, were narrowly targeted for heightened scrutiny by a US EPA initiative, and were larger and thus more prominent in their environment. While we find some evidence that state-level statutory immunity facilitates self-disclosure, we find no evidence that statutory audit privilege does so. The pitched political battles over regulation in the 1970s and 1980s, from deregulation to Reagan's vow to get government "off the backs" of industry, have given way in recent years to a new
SSRN Electronic Journal, 2000
Regulators and financial commentators recently have expressed concerns that the implications of foreign earnings designated as permanently reinvested earnings (PRE) are not transparent to investors as a result of missing or insufficient financial statement disclosures. To shed light on these concerns, we investigate firms' noncompliance with ASC 740 provisions requiring financial statement disclosure of PRE (and the unrecorded deferred tax liabilities associated with PRE). Based on a sample of S&P 500 firms from 1999 to 2010, we find that (1) a significant portion of firms fail to comply with the mandatory disclosure requirements for PRE, (2) noncompliance spans a long window of time and is an issue among even the largest, most sophisticated firms in the U.S. capital markets, and (3) the amounts of undisclosed PRE (and the related tax) are substantial in magnitude. Further analysis suggests that firms strategically choose not to comply with the PRE (and related tax) disclosure requirements under ASC 740. We find that compliance with the mandatory disclosure requirements for PRE increases with the materiality of the unrecorded tax liability associated with PRE, for firms operating in more litigious or less competitive industries, and after the enactment of the American Jobs Creation Act of 2004, which increased incentives to disclose PRE.
Auditor conservatism and voluntary disclosure: Evidence from the Year 2000 systems issue
Accounting & Finance, 2003
This study further examines the phenomenon of conservative auditor behaviour by considering the level of voluntary disclosure of Year 2000 remediation information in company annual reports. Previous studies have provided evidence of conservative auditor behaviour by examining the link between Big 6 auditor choice and accruals (Francis and Krishnan 1999; Becker et al. , 1998; Defond and Subramanyam 1998). Protecting their reputation capital increases Big 6 auditor incentives to act conservatively to avoid litigation risk. We propose and find that Big 6 auditor clients disclose more Year 2000 remediation information than non-Big 6 auditor clients.
Illicit accounting practice and corporate earnings irregularities
Investment management & financial innovations, 2017
This paper develops a static model of earnings manipulation as illicit activity conducted by top executives of a firm, such as a firm’s chief financial officer or chief executive officer. In the model, the utility-maximizing executive decides upon an allocation of time, a costly resource, to the commission of licit and illicit accounting activity based on the expected benefits and costs of these actions. Illicit accounting practices may benefit the firm’s profitability and possibly the executive’s compensation but also incur risks of detection and subsequent sanctions, including jail time; the expected cost of the illicit activity potentially acts as a deterrence to such practices. We investigate comparative-static relationships that formalize how the individual’s illegal activity might increase or decrease given variation in key exogenous factors, some of which may reflect official policy or procedure. Our study provides a more concrete conceptual foundation for empirical analysis ...
Managerial Auditing Journal, 2020
PurposeThis paper aims to examine the relation between voluntary disclosure (VD) in audit committee reports and banks’ earnings management. It investigates whether such disclosure reflects an attempt by audit committees to engage in impression management.Design/methodology/approachThe study considers top US bank holding companies from 2006 to 2015. The authors develop a scoring grid to measure VD in audit committee reports. The scoring grid is based on recommendations from 10 industry and governance organizations’ reports that analyzed audit committee disclosures. Multivariate regression analyzes are used in this paper.FindingsDescriptive statistics reveal that the level of VD in audit committee reports did not increase significantly from 2006 to 2015. Multivariate analyzes indicate that whenever banks’ level of earnings management is high, audit committees increase the extent of their VDs in their reports. The authors infer from this finding that audit committees are using VDs as a...
The Impact of Economic Incentives and Peer Influences on Honest Reporting Behavior
ru.nl
Classical agency theory argues that economic incentives can have a strong impact on opportunistic reporting behavior. On the other hand, recent behavioral literature suggests that agents making reporting decisions also adhere to social norms in the environment (i.e. peer influence). Most studies, however, examine these effects in isolation, ignoring the role of formal governance mechanisms that firms often employ (Sprinkle 2003). This research shows that either the effect of incentives or that of social norms (i.e. peer influence) can dominate, depending on the use of formal audits. In an experiment, we vary the material pay-offs for lying (low vs. high compensation rate), the level of honesty of peers (low vs. high) and whether the reporting decision remains unaudited or audited. Results suggest that when decisions remain unaudited, honest reporting is heavily influenced by incentives (material pay-offs for lying), while peer influence has no effect. Conversely, when reporting decisions are audited, peer influence has a strong effect on reporting behavior, whereas the impact of incentives is weaker. Findings imply that firms should not underestimate the role of formal governance mechanisms (e.g. internal audits) to promote honesty by the use of social norms in the environment (i.e. peer influence).
Disclosure regulation, situational risk, situational ethics, and earnings management
Humanomics, 2007
Purpose-The purpose of this paper is to explain an economic incentive to manage earnings derived from the intersection of disclosure theory and equity theory and to discuss its behavioral implications. Design/methodology/approach-This is a theoretical paper. Findings-A taxonomy of possible managerial reactions to increased disclosure regulation shows that deception (e.g. earnings management) bears relatively low-situational-ethics and high-situationalrisk. Research limitations/implications-The taxonomy suggests that deceptive behavior would be better explained by broadening the traditional agency model with a situational ethics component and by relaxing its risk-aversion assumption. Practical implications-Theoretical findings suggest that the implementation of additional mandatory disclosure is not an appropriate strategy to limit earnings management in a context where the production of information is implicitly costly for managers, and where information asymmetry exists between managers and investors. However, regulations that raise managers' awareness regarding personal risks involved with earnings management, such as the Sarbanes-Oxley Act, appear likely to reduce the prevalence of earnings management. Originality/value-This paper is one of the first to focus on economic incentives, ethical considerations, and personal risk considerations simultaneously.