Companies face strong incentives to meet expectations – whether their own or those of the capital markets. A wide literature shows that this can lead to deceptive behavior by firms, which can amount to anything from overly aggressive accounting to outright fraud.
Prior research (e.g., Cohen et al. (2008)) also shows that, subsequent to the 2002 Sarbanes-Oxley Act, firms are increasingly engaging in real-activities management – that is, operating decisions taken for short-term financial benefit at the expense of long-term gain – in lieu of, or prior to, accrual-based earnings management. Yet, while we now know a fair bit about … Read more