Topic:Penny-Wise and Pound-Foolish: Does Striving to Meet Earnings Expectations by Manipulating Real Activities Undermine Product Quality？

Time: 2:00-3:30 PM, Wednesday, June 2, 2021

Venue: 9406 JINGSHI HOTEL

Speaker: Ma Lijun

Abstract：

We examine whether managers’ activities in striving to reach earnings targets affect their firms’ product quality. We find that firms suspected of manipulating real activities in trying to meet earnings benchmarks exhibit a higher likelihood and frequency of product recalls. Other evidence implies that high earnings pressure induces managers to manipulate real activities, resulting in more product quality failures. In cross-sectional results consistent with expectations, we find that the impact of exploiting real activities to attain earnings benchmarks on product recalls intensifies for firms whose managers have stronger incentives to manage earnings and subsides for firms subject to greater customer power. Additional tests show that suspected benchmark targeting also raises the severity of product recalls and that investors react less strongly to small positive earnings surprises for firms with a history of product recalls.

Introduction of the speaker:

MaLijun is an associate professor in the Department of Finance, Business School, University of International Business and Economics. He received his Ph.D. in accounting from Renmin University of China in 2017.His research interests include corporate finance and corporate governance, focusing on culture and corporate finance, securities analysts and capital markets, and corporate ESG behavior.His research results have been published in Management World, European Accounting Review, Journal of Corporate Finance and other journals. And he wasawarded the title of Huiyuan Outstanding Young Scholar of University of International Business and Economics.