Geographic Dispersion and Earnings Management

Abstract

Using a sample of U.S. listed firms in the period from 1994 to 2011, we examine how the geographic dispersion of a firm affects the earnings management’s choice between accrual based management and real activities management. We show that geographically dispersed firms have lower accrual based management but higher real earnings management, when compared to geographically concentrated firms. These patterns remain robust to various proxies for geographic dispersion and are not likely to be driven by the firm’s endogenous choice. We further show that our results are consistent with the investor recognition explanation as in Merton (1987) and Garcia and Norli (2012).

Keywords: Geographic dispersion; Accrual-based earnings management; real activities earnings management

JEL Classification: M41