Seminar by Michel Magnan

Piano Terra, Palazzo Levi Cases, Via del Santo 33 - ore 09.30 Aula LIM

29.05.2018

Seminar by Michel Magnan, Concordia University

Title: Damage Control: Earnings Management by Firms Facing Product Harm Crises” (co-authored by Like Jang, Lixin Su and Shafu Zhang)

Abstract: A product harm crisis is a publicized event whereby a firm’s product is either reported as being defective and/or fails to fulfill a mandatory safety standard. Such crises undermine a firm’s reputation and its managers’ career outlooks. We find evidence that managers engage in income-increasing earnings management when their firms experience product harm crises. Such earnings manipulation reduces the likelihood of customer loss and CEO forced turnover in the short run. Various tests suggest that our finding is consistent with opportunistic earnings manipulation, rather than a signaling explanation. Collectively, our results point toward managers employing financial reporting discretion to mitigate the reputation impairment and potential personal costs associated with product harm crises. At the margin, customers and boards of directors appear to be influenced by such opportunistic behavior.