Doing good when doing well: evidence on real earnings management

Grieser, William; Hadlock, Charles J.; Pierce, Joshua R.

doi:10.1007/s11142-021-09610-y

Cited by 10 publications

(3 citation statements)

References 66 publications

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“…This theory is supported by studies showing managers’ involvement in philanthropic programs and charitable contributions that may not align with the firm’s main business functions or contribute to its financial performance, a dichotomy often referred to as immaterial versus material CSR (Sustainability Accounting Standards Board, 2017). Such engagements, while possibly not enhancing actual firm value, can inflate a firm’s CSR reputation and, consequently, garner positive investor responses (Bonini and Chênevert, 2008; Grieser et al , 2021).…”

Section: Theory and Hypothesis Developmentmentioning

confidence: 99%

“…Therefore, viewed through this lens, the positive market responses to CSR initiatives may indicate an overestimation influenced by amplified investor enthusiasm. This phenomenon suggests the possibility of a market mispricing scenario, wherein the market assigns excessive value to CSR initiatives in terms of the firm’s valuation and projected profits, potentially overlooking the actual effect of these activities (Bonini and Chênevert, 2008; Grieser et al , 2021).…”

Section: Theory and Hypothesis Developmentmentioning

confidence: 99%

“…Thus, from this standpoint, the optimistic market reactions to CSR activities might reflect an overvaluation driven by heightened investor sentiment. This raises a potential for market mispricing, where the market attributes undue benefits to CSR activities regarding the firm’s value and expected earnings, misjudging their true impact (Bonini and Chênevert, 2008; Grieser et al , 2021).…”

Section: Introductionmentioning

confidence: 99%

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A comparison of analysts’ and investors’ information efficiency of corporate social responsibility activities

Kang,

Heo,

Jeon

2024

SAMPJ

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Purpose This paper aims to examine the extent to which sell-side analysts efficiently incorporate firms’ corporate social responsibility (CSR) activities into their earnings forecasts. In addition, this paper also investigate the CSR information efficiency of analysts vis-à-vis that of investors. Design/methodology/approach This paper measures CSR activities by using CSR strength and CSR concern scores from the Morgan Stanley Capital International Environmental, Social and Governance database. This paper uses analysts’ earnings forecast errors and dispersion as proxies for their information efficiency. To compare the CSR information efficiency of analysts to that of investors, this paper uses the Vt/Pt ratio, which is the equity value estimates inferred from analysts’ earnings forecasts (a proxy for analysts’ CSR information efficiency) to the stock price of the focal company (a proxy for investors’ CSR information efficiency). Findings The regression analysis indicates that analysts’ earnings forecasts are optimistically biased and more dispersed for firms with positive CSR activities. The paper also finds that analysts’ forecasts are more optimistically biased than investors in interpreting CSR activities. Practical implications The lack of standardized protocols in CSR reporting and activities has raised the risk of mispricing by analysts, threatening the stability of sustainable investments. This paper suggests that regulators and standard-setters should establish a uniform framework governing firms’ CSR activities, along with their reporting and measurement, to ensure more consistent and reliable evaluations of CSR practices. Social implications Analysts’ mispricing of CSR activities may distort sustainable investing, as it can overly focus on the positive impacts of stakeholder theory, overlooking agency theory’s warnings about managerial self-interest. Investors need to assess CSR efforts with a dual perspective, acknowledging their societal value but also examining their alignment with shareholder interests. Originality/value To the best of the authors’ knowledge, this research is the first to assess the efficiency of analysts versus investors in processing CSR information amidst growing sustainable investment interests. Furthermore, building on Dhaliwal et al. (2012), which found that voluntary CSR disclosures correlate with more accurate analyst forecasts, this research provides fresh perspectives on the evolving nature of how analysts assimilate CSR information over time.

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Section: Theory and Hypothesis Developmentmentioning

confidence: 99%

Section: Theory and Hypothesis Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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A comparison of analysts’ and investors’ information efficiency of corporate social responsibility activities

Kang,

Heo,

Jeon

2024

SAMPJ

View full text Add to dashboard Cite

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Real earnings management and the strategic release of new products: evidence from the motion picture industry

2023

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Prior studies on real earnings management (REM) focus mainly on estimating abnormal operating and investing activities at the firm level. We extend this literature by providing micro-level evidence regarding how financial reporting pressures influence new product release decisions, or product-level REM. Specifically, we compare how public and private studios differentially time the release of their movies. We find that, faced with pressure to boost quarterly revenues and earnings, public studios are more likely to release movies with high expected revenues in the last month of a fiscal quarter, compared to private studios. This documented result is stronger for firms with recent poor past performance, but is not present for movies in genres with a more targeted release window (e.g., romance and horror movies) and those using directors who have a history of collaboration with the studio. These results suggest that studios choose REM activities that have a lower impact on consumer demand and that minimize conflict with talent, consistent with choosing less costly activities to achieve financial reporting goals. A negative consequence of this financial reporting–driven product release strategy is that movies released in the last month of a quarter have lower international box office revenues. Taken together, these results provide evidence of the existence and consequences of product-level REM.

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