Terrorist Attacks, Managerial Sentiment, and Corporate Disclosures

Abstract

<jats:p>This study investigates the effect of managerial sentiment on corporate disclosure decisions. Using terrorist attacks in the United States as adverse shocks to managerial sentiment, we find that firms located in the metropolitan areas attacked issue more negatively biased earnings forecasts. The effect is stronger for firms with higher operating uncertainty and firms with younger, inexperienced, or less confident executives and it is weaker for firms located in states with increasing violent crime rates. A potential alternative explanation is that managers strategically bias earnings forecasts downward and attribute the poor performance to terrorist attacks. To address this issue, we conduct a battery of additional analyses and find results more consistent with managerial sentiment than strategic attribution. In addition, we show that our results are unlikely to be driven by any economic effects of terrorist attacks. Finally, firms in attacked areas exhibit a more pessimistic tone in 10-K/10-Q filings.</jats:p>

Managerial ability, earnings quality and ISIS: evidence from Iraq

“…Given the obvious increase in terrorist activities in recent years (e.g., Miller, 2016), this paper suggests that investors and regulators should be vigilant of the negative impact of terrorist activities or geographical proximity to terrorist groups/activities on the accounting choices by managers when assessing the costs of terrorism and developing policies. In addition, in response to recent calls to study the firm-level consequences of terrorism in different countries (e.g., Chen et al, 2020b), this paper would provide beneficial insights on the role of a modern terrorist group, ISIS.…”

“…Cui et al (2020) discuss that to reduce the negative impact of macroeconomic uncertainty, such as higher capital costs, managers are strongly motivated to provide high quality information (Verrecchia, 1990;Baker et al, 2016). Particularly, in the context of high macroeconomic uncertainty from terrorist activities, managers can easily attribute their poor performance to terrorist attacks (e.g., Chen et al, 2020b), therefore, they do not necessarily need to opportunistically influence accruals accounting. In addition, Schmid (2005) states that terrorist activities may cause managers to experience the psychological consequences of fear and pessimism making them more risk averse.…”

“…Lin (2020) studies the impact of terrorist attacks on audit practices suggesting that terrorist attacks that occur within 10 miles of the auditors' office have the strongest impact. Relatedly, Chen et al (2020b) reveal that the geographical distance between a firm and the location of terrorist attacks influences earnings disclosures. Thus, consistent with arguments regarding the second hypothesisincluding the opportunistic perspective versus the efficient perspective on ISIS impactsit is expected that closeness to ISIS-controlled territories influences the association of managerial ability and earnings quality.…”

“…The findings of this paper carry potential implications for investment practitioners, regulators, and academics. As Chen et al (2020b) point out "the economics of security is one of the most important issues in our discipline, yet, the one least researched". In addition, in response to the recent call to study the firm-level consequences of terrorism in different countries (e.g., Chen et al, 2020c), this study provides insight into the impact of a modern terrorist group i.e., ISIS.…”

Outbreak risk, managerial distraction, and corporate information disclosure: Evidence from the COVID-19 pandemic

“…We compare affected managers with managers in the control group using a generalized difference-in-differences (DID) approach to estimate the effect of managerial distraction on firm disclosure behavior and quality. Furthermore, we exclude the alternative explanation -managers might intentionally choose a more inaccurate disclosure strategy to communicate the expectation of pandemic uncertainty with market ( Chen et al, 2021 ). Arguably, we could alleviate this concern to some extent by confirming whether management earnings forecast quality is largely affected by two psychological mechanisms: managers' increasing work burden and narrowing perceptions.…”