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We examine the impact of corporate risk-taking on firm-level real earnings management. We find that firms with higher risk-taking engage in higher real earnings management. Our results are robust to a series of robustness tests, including simultaneous least squares approach, firm fixed effect, change analysis, and pseudo difference-in-difference analysis. Additional analyses reveal that the impact of risk-taking on real earnings management is more pronounced among firms that experience prior-year loss and are run by top-echelons who are risk lovers. Sarbanes-Oxley Act (SOX) regulation does not attenuate the positive effect of risk-taking on real earnings management. However, external monitoring by institutional investors and takeover susceptibility curb the relation between risk-taking and real earnings management. Our study highlights that outsider, such as investors and regulators, should pay close attention to a firm’s risk-taking behavior to unravel the extent of real earnings management in the firm.

We examine the effect of asset redeployability on corporate misconduct and find a significant positive relationship.Utilizing a large sample of public US firms for the period of 2001 to 2015, we find that a one standard deviation (SD) increase in the proportion of redeployable assets leads to a 7.2% increase in corporate fines. We also find that the positive association between asset redeployability and corporate misconduct varies across types of misconduct and industrial heterogeneity. In our channel analysis, we find that managerial risk-taking is a potential mechanism through which asset redeployability is associated with misconduct.Additional tests reveal that corporate misconduct associated with asset redeployability leads to lower firm value. Our results remained robust in a series of sensitivity tests and continue to hold after accounting for potential endogeneity concerns. Our paper contributes to the ongoing discourse on the costs and benefits of asset redeployability.

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