Risk reporting and earnings smoothing: signaling or managerial opportunism?

Hend Monjed, Salma Ibrahim*, Bjorn Jorgensen

*Motsvarande författare för detta arbete

Forskningsoutput: TidskriftsbidragArtikelVetenskapligPeer review

Sammanfattning

Purpose
The purpose of this study is to examine the association between two reporting mechanisms used by managers to communicate risk information to the capital market: risk disclosure and earnings smoothing.
Design/methodology/approach
This study juxtaposes two competing hypotheses, the “opportunistic” and the “signaling”, and empirically investigates whether one dominates the other for a sample of large UK firms for the period 2005–2015. This study also uses the global financial crisis as an arguably exogenous shock on overall risk in the economy to investigate its effect on managers' joint use of textual risk disclosures and earnings smoothing.
Findings
This study finds that risk disclosure and earnings smoothing are negatively associated. This finding supports that managers with incentives to mask the firm’s true underlying risk through smoothing earnings provide lower levels of risk-related disclosures. This study documents that the trade-off between risk disclosure and earnings smoothing is more pronounced during the global financial crisis period than before and after the crisis period. Further, this study demonstrates a more negative association for firms with higher volatility of cash flows. This negative association is robust to various model specifications, additional corporate governance related controls and an alternative measure of earnings smoothing.
Originality/value
The findings provide new empirical evidence about the association between risk disclosure and earnings smoothing and support the opportunistic hypothesis, especially when firms are faced with increased risk.
OriginalspråkEngelska
Referentgranskad vetenskaplig tidskriftReview of Accounting and Finance
Volym21
Nummer5
Sidor (från-till)377-397
Antal sidor21
ISSN1475-7702
DOI
StatusPublicerad - 30.09.2022
MoE-publikationstypA1 Originalartikel i en vetenskaplig tidskrift

Nyckelord

  • 512 Företagsekonomi

Styrkeområden och områden med hög potential (AoS och AoHP)

  • AoS: Finansiering, redovisning och företagsstyrning

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