Firm‐Level Political Risk and Earnings Manipulation

As critical external governance actors, auditors proactively shape cross-border regulatory outcomes. Using data from Chinese A-share listed multinational corporations from 2017 to 2023, our study analyzes text from the “Key Audit Matters” sections of audit reports to develop an index measuring auditors’ host-country risk perception(RP). We empirically investigate how RP influence earnings manipulation practices in multinational corporations. Results show that RP significantly reduce earnings manipulation in multinational enterprises. Mechanism tests reveal that auditors address heightened risk perceptions by raising audit fees and lengthening audit timelines, which directly curbs opportunities for earnings manipulation. The heterogeneity analyses indicate that this negative relationship is more pronounced when auditors possess multinational expertise, the host countries of overseas subsidiaries have weaker rule of law, the geographical distance between overseas subsidiaries and the home country is greater, and the enterprise’s ownership is non-state-owned. By establishing RP as an effective alternative governance mechanism, this research advances the theoretical framework for cross-border audit governance. It also offers practical guidance for emerging markets seeking to reduce multinational corporations’ earnings manipulation through enhanced audit oversight.

This study examines the impact of investor attention, and economic policy uncertainty on travel & leisure stocks returns amid the COVID-19 pandemic. We use Google search volume (GSV) and economic policy uncertainty (EPU) as a proxy for investor attention and uncertainty. Our findings indicate greater sensitivity of travel & leisure stock returns to investor attention and economic policy uncertainty amid the COVID-19 crisis period.

Using various proxies for investor attention, past studies find that attention-grabbing stocks tend to experience positive price pressure. However, few studies consider the influences of market states. Whether market states affect investor attention has not been fully explored. To fill up the gap, this study explores the attention effect on stock returns across market states using a sample of firms in Taiwan. The findings show that the attention effect varies under different market conditions. Specifically, investors are relatively active when the market expresses good prospects. The attention effect of investors on stock returns is stronger in a bull market than in a bear market. This result suggests a rising stock market draws more investor attention that translates to positive price pressures than a declining stock market does. Therefore, the attention effect is found varying with market states.

ABSTRACTThis article documents the motivation, the construction, and the profitability of an investment strategy based on investor attention in the options market. Using the option volume after a 1-week dormant period as a proxy for investor attention, the author shows that heightened investor attention after the dormant period has rich investment implications. A portfolio constructed on the basis of volume spike events immediately after the dormant period generates an abnormal return of 68 basis points on a monthly basis (8.16% on an annualized basis). This abnormal return is robust to risk adjustment using standard asset pricing models. The author's findings constitute strong evidence that it is profitable for outside investors to mimic attentive investors in the options market and reap economically and statistically significant profits.

Investor Attention and the Response of US Stock Sectors to the COVID-19 Crisis

Investor attention and stock market activity: Evidence from France

Investors have a finite capacity to organize all information they receive from financial disclosures. Under rational inattention, we show that investor processing capacity affects the probability of disclosure. Our main result is that the likelihood of disclosure is inverse-U shaped in investor attention. For low levels of attention, more attention facilitates communication and increases disclosure; for high levels of attention, more attention better identifies, and therefore deters, unfavorable voluntary disclosures. We provide empirical evidence that the relationship between investor attention and management forecast follows the predictions of the theory, using institutional ownership as a proxy for investor attention as well as exogenous shocks to fund manager distraction. JEL Classifications: D83; G14; M4.

A negative relationship between stock market returns and inflationary trends has been widely documented for developed economies in Europe and North America. This study provides similar evidence for India. This relationship is investigated in light of Fama's explanation that centres around linkages between inflation and real activity, and between stock returns and real activity. Specifically, the study tests whether the negative stock return-inflation relationship is explained by a negative relationship between inflation and real economic activity, and a positive relationship between real activity and stock returns. The results from the heteroscedasticity and autocorrelation corrected models provide only partial support for Fama's hypothesis. The relationship between real activity and inflation does not account for the negative relationship between real stock returns and the unexpected component of inflation.

In this paper, we employ Weibo Index as the proxy for investor attention and analyze the relationships between investor attention and stock market performance, i.e., trading volume, return, and volatility. The empirical results firstly show that Weibo attention is positively related to trading volume, intraday volatility, and return. Secondly, there exist bidirectional causal relationships between Weibo attention and stock market performance. Thirdly, we generally find that higher Weibo attention indicates higher correlation coefficients with the quantile regression analysis.

PropósitoEl propósito de este estudio es investigar la influencia del sentimiento de los inversionistas a nivel de empresa en la manipulación contable de las empresas brasileñas entre 2010 y 2018. El documento pretende aportar una visión más profunda sobre la relación entre las expectativas de los inversores y la toma de decisiones de los gestores en un mercado emergente.Diseño/metodologia/enfoqueusamos el enfoque cuantitativo y aplicamos un modelo de regresión lineal múltiple para probar la relación entre las acumulaciones anormales, el índice de sentimiento de los inversores a nivel de empresa y las variables de control. La muestra final incluye datos de 175 empresas, entre 2010 y 2018.HallazgosLos resultados revelan una asociación negativa entre el sentimiento de los inversores a nivel de empresa y la manipulación contable basada em acumulaciones, lo que podría significar que la propensión al riesgo de los administradores a manipular las ganancias aumenta cuando enfrentan pérdidas conocidas en el mercado de capitales.Limitaciones/implicaciones de la investigaciónlos resultados de la investigación proporcionan una valiosa comprensión de cómo las expectativas de los mercados de capitales emergentes pueden influir en las decisiones de gestión, como la manipulación contable basada en acumulaciones. El área geográfica de estudio se limitó únicamente a Brasil y, en consecuencia, los hallazgos y conclusiones del estudio tuvieron sus límites.Originalidad/valorestudios anteriores sobre mercados desarrollados muestran que el sentimiento de los inversores a nivel de mercado influye positivamente en la manipulación contable. Sin embargo, el presente estudio muestra que el índice de sentimiento de los inversores a nivel de empresa tiene una relación significativa y negativa con la manipulación de las ganancias de las empresas brasileñas, mientras que el sentimiento del mercado indica una relación contradictoria en estudios anteriores en el país.

We examine the impact of political risk on firms’ payout policy. Using a large international sample across 35 countries over the period from 1990 to 2008, we find that global political crises raise the market perceived uncertainty and cost of external financing. Using crisis events as a proxy for political risk, we document that past dividend payers are more likely to terminate dividends and that non-payers are less likely to initiate dividends during periods of high political risk. These findings suggest a precautionary incentive of managers in response to political shocks. Further analysis shows that the effect of political risk on payout policy is stronger for multinational corporations, but can be attenuated by country-specific institutional settings, such as more stable political systems and stronger investor legal protection.

The significance to prepare reliable information discloses the need to fall back on an external auditor and a quality auditing process that can caution against the management of earnings. In line with the business practice, auditing does not provide sufficient coverage for some earnings management (EM) activities that result in financial statement fraud. Over the years, capital markets around the globe have witnessed numerous corporate financial scandals largely because of financial and accounting figures' manipulation. This has led to casting doubt on the quality of published financial reports and questioning the ability of the audit process. Against this background, this study examined the relationship between audit quality and real earnings management of listed manufacturing companies in Nigeria. Specifically, this study evaluated the effect of audit firm size, audit firm industry specialization, audit firm tenure, and audit firm independence on real earnings management. The study sampled 38 out of 55 listed manufacturing companies that cut-across different sectors from 2013 to 2020. From the multivariate analysis, the findings revealed a significant relationship between audit quality (audit firm size and audit firm independence) with a p-value of 0.014 and 0.003 respectively. It was concluded that firms audited by Big-4 firms with independence attract greater publicity and tighter scrutiny; hence, companies tend to desist from managing their earnings. The study, therefore, recommended that the management of manufacturing firms in Nigeria should persist in engaging experience audit firms with international affiliations, and they should work strictly with the CAMA, 2020 as amended by rotating audit firms after every three years as this will promote the reliability of financial statement prepared by management, and finally reduce manipulation of earnings.

Purpose: Tax strategy affects earnings. However, little is known about how tax incen-tives affect accounting quality. Existing research suggests that firms are more likely to engage in earnings management (EM) when tax costs are lower and when tax minimi-sation motives prevail. We hypothesise that tax incentives mitigate EM activities. Design/Methodology/Approach: We exploit the implementation of the Hyper-De-preciation provision, a tax investment incentive provision within the Italian Industry 4.0 Plan. Our analysis examined private firms' EM practices through panel regression and a difference-in-differences approach, comparing behaviour before and after the tax incentive enactment using a matched sample of Austrian firms as a control group. Findings: Our analysis indicates that private firms' overall EM activity decreases fol-lowing the enactment of the incentive, with varying responses dependent on govern-ance structures. Firms that are closely held, i.e., managed by an owner-manager, re-main largely unaffected by the financial reporting implications of the tax incentive. Conversely, firms that are not closely held, experiencing different levels of stakeholder pressure, demonstrate a consistent reduction in earnings manipulation across various EM metrics. Originality/value: We provide novel insights into how tax incentives can influence accounting quality, an important yet understudied aspect of corporate taxation. We contribute to the accounting literature by demonstrating how governance structures can significantly influence firms' responses to tax incentives in terms of EM. Practical implications: By highlighting the unintended consequences of tax invest-ment incentives, these findings have implications for policymakers when designing tax stimulus measures.

Using daily advertising data, we analyze the short-term effects of advertising on investor attention and on financial market outcomes. Based on various investor attention proxies, we show that advertising positively affects attention. However, it has only little impact on turnover and liquidity. Most importantly, short-term stock returns are not significantly influenced by advertising. Further results suggest that previous findings of an economically significant positive relation between advertising and returns are due to reverse causality. Thus, the belief that stock prices can be temporarily inflated via advertising is misguided.

Le premier objectif de cet article est de déterminer s’il existe une relation entre la détresse financière des entreprises et la gestion des résultats. Le second objectif est de déterminer comment la gestion des résultats est opérée durant ces périodes spécifiques de difficultés financières. Les données sont issues de la base ORBIS. Un échantillon de 6 190 compagnies non financières françaises non cotées est analysé sur la période 2009-2016. Les tests sont réalisés à partir d’analyses multivariées. Les résultats indiquent que plus les difficultés financières sont importantes, plus les sociétés ont recours à la gestion de leur résultat à la hausse. Pour cela, elles favorisent l’utilisation de variables impactant leur activité réelle plutôt que l’utilisation de variables comptables de régularisation discrétionnaires. Les résultats obtenus peuvent être ainsi particulièrement utiles aux auditeurs et aux organes de contrôle. En effet, il est démontré que, lors de périodes de difficultés financières, leurs diligences ne doivent pas uniquement portées sur les variables comptables de régularisation discrétionnaire telles que les provisions mais aussi sur les variables impactant les décisions d’exploitation, de financement ou d’investissement. Cette analyse participe à un débat bien connu, celui de la gestion du résultat. Les résultats obtenus démontrent que lorsque les sociétés traversent des périodes de difficultés financières, elles utilisent alternativement des variables comptables de régularisation discrétionnaire et des variables relatives à leur activité réelle afin de gérer leur résultat. Les résultats contribuent à la littérature qui porte sur le rôle des cadres institutionnels et sur la motivation des sociétés dans l’utilisation des outils de gestion du résultat.