In response to the recent debate on the media, this paper examines the effect of media coverage on firm earnings management. Even if prior studies (Dyck et al., 2010;Miller, 2006) have documented the media's role in detecting and deterring accounting fraud (or extreme earnings management), it is unclear ex ante whether the media amplifies or curbs less egregious earnings management. Our results show that media coverage is negatively associated with both accrual-based and real earnings management, suggesting that the media serves as an external monitor that curbs managers' opportunistic earnings management behaviors. Further analyses show that the effect of media coverage on earnings management is more pronounced when monitoring from auditors is weak and when the other information intermediaries are active. Overall, the findings suggest a monitoring role of the media in firm financial reporting practices.
In this article, we study the contagion effects of accounting restatements issued by foreign firms traded in the United States. Specifically, we predict and find that accounting restatements that negatively affect the share prices of the restating foreign firms raise investor concerns that nonrestating foreign firms from the same home countries have similar accounting issues, and therefore induce a negative stock market reaction to nonrestating home country peer firms. We refer to this as a restatement-induced home country contagion effect. On average, nonrestating home country peer firms experience a negative stock market return of approximately −0.69% over a 3-day window around the restatement announcement. Moreover, we hypothesize and show that the strength of the home market rule of law (ROL) affects investor assessment of the likelihood that peer firms have similar accounting issues, and therefore affects the magnitude of the contagion. Specifically, nonrestating home country peer firms from countries with weak ROL experience an average stock price decline of approximately −1.32%, whereas peer firms from strong ROL countries experience an average negative return of only −0.26% over the 3-day window around the restatement. These results suggest that restatements filed by weak ROL firms are perceived to be more “contagious” than those filed by strong ROL firms.
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