The Credibility of Financial Reporting: A Reputation-Based Approach

• 成果类型: Article
• 署名作者: Liang, Ying; Marinovic, Ivan; Varas, Felipe
• 署名单位: City University of New York (CUNY) System; Baruch College (CUNY); Stanford University; Duke University
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/accr-51764
• 发表日期: 2018
• 页码: 317-333
• 关键词: earnings management; MODEL; COMPENSATION; INVESTMENT; DYNAMICS; returns; QUALITY; MARKETS

摘要

This paper studies the reliability of financial reporting when the credibility of the manager, represented by his misreporting propensity, is unknown. We show that credibility concerns affect the time-series of reported earnings, book values, and stock prices in ways that seem consistent with empirical evidence. When investors are uncertain about the credibility of the reporting process, earnings response coefficients, as well as market-to-book values (MTB), are random and time-varying; relatively low MTB reflect poor credibility of financial reporting; stock prices are s-shaped in earnings surprises and relatively insensitive to bad news. Finally, when the manager is more likely to have reporting discretion, discretionary accruals tend to be larger and more volatile. We estimate the model using U.S. earnings announcement data during 2002-2012 and find that the probability of misreporting is 7 percent. A counterfactual analysis reveals that ignoring the possibility of misreporting leads to overestimation of the mean (3.5 percent), volatility (13 percent), and persistence of earnings (17 percent).