The Effect of Earnings Management on Shareholder Value and the Role of Board Gender Diversity: Evidence from Terrorism

Abstract

Purpose

We investigate whether shareholders are convinced by earnings management. We also explore how board gender diversity (the presence of female directors on the board) may influence the extent to which shareholders are convinced by earnings management.

Design/Methodology

We estimate the stock market reactions to the September 11 terrorist attack using the standard event study methodology. We then run a cross-sectional analysis to investigate whether the market reactions are influenced by the extent of earnings management. Furthermore, we test how board gender diversity affects the degree to which earnings management influences the stock market reactions.

Findings

Our results show that the market reactions to the attack are substantially mitigated for firms that exercise more upward discretionary accruals, implying that earnings management is successful in convincing shareholders. Additional analysis corroborates the results, including propensity score matching, instrumental-variable analysis, and using Oster’s (2019) method for testing coefficient stability. Crucially, we find that board gender diversity helps shareholders see through earnings management better. The presence of female directors significantly weakens the extent to which shareholders are persuaded by earnings management.

Originality

Our study is the first to explore the effect of earnings management on shareholder wealth using the September 11 terrorist attack. Our research design is less vulnerable to endogeneity and is thus much more likely to show a causal effect of accounting accruals on shareholder wealth.