Does late 10K filing impact companies’ financial reporting strategy? Evidence from discretionary accruals and real transaction management

Abstract

The study investigates how late 10K filers adapt their financial reporting strategy in the post-late filing period in their response to bad publicity, negative market sentiment, and higher stakeholders' scrutiny resulting from reporting delays. Both the level and change regressions show that late 10K filers significantly reduce the use of discretionary accruals from pre-to post-late filing year. However, they simultaneously increase real transaction management over the same time period. The trade-offs between the two earnings management techniques are more prominent when the late filers have a strong incentive to meet or beat earnings benchmarks. Our primary results are robust when late filings are caused by accounting, auditing, and internal control issues, and when the late filers cited no meaningful reason for late 10K filings. It is further evident that late filers with material internal control weaknesses and late filers that subsequently restate their financial statements make relatively higher trade-offs than the matched non-late filers. Finally, the tradeoffs between reduced accruals and increased real transaction management are stronger for the accelerated filers, and for the late filers audited by Big 4 auditors.

Less timely earnings announcements and voluntary disclosure

“…Bartov and Konchitchki (2017) find that late 10-K or 10-Q filers experience negative capital market consequences. Mitra et al (2019) suggest that late 10-K filers change their financial reporting strategy to mitigate the negative market perception regarding reporting delays.…”

“…Mitra et al. (2019) suggest that late 10‐K filers change their financial reporting strategy to mitigate the negative market perception regarding reporting delays.…”