Another victory of retail investors: Social media's monitoring role on firms' earnings management |
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| Institution: | 1. School of Public Finance and Taxation, Central University of Finance and Economics, China;2. International Business School, University of International Business and Economics, 10 Huixin East Avenue, Chaoyang District, Beijing 100029, China;3. School of Economics and Management, Tsinghua University, China;1. Business School, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing 100081, China;2. School of Finance, Capital University of Economics and Business, 121 Zhangjialukou, Huaxiang Fengtai District, Beijing 100070, China;1. The Olayan School of Business, American University of Beirut, Bliss Street, Beirut, Lebanon;2. Virginia Tech, Pamplin College of Business, VA 24060, United States;1. Lubar School of Business, University of Wisconsin-Milwaukee, WI, USA;2. Goizueta Business School, Emory University, GA, USA;3. Gatton College of Business and Economics, University of Kentucky, KY, USA;4. Naveen Jindal School of Management, University of Texas at Dallas, TX, USA;1. Department of Accounting and Finance, Lancaster University, UK;2. Glorious Sun School of Business and Management, Donghua University, China;3. International College, Renmin University of China, China |
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| Abstract: | Stock forums are expected to complement individual investors' sophistication via collective wisdom, thus triggering extreme market reactions through uniform scattered opinions. This paper investigates whether stock forums improve corporate governance and decrease earnings management among firms. We found that increased posts, views and comments in a stock forum raise firms' potential costs for obfuscating corporate performance and constrain their upward earnings management. Stock forum discussion tends to increase the likelihood of and the penalties for earnings management detection. By decomposing the cost of earnings management into tangible and regulatory costs, we find that the stock forum governance effect is more pronounced in firms with higher managerial ownership and higher regulatory risk. Social media is a complement and intensifier of traditional mass media. Firms with broader media coverage are more sensitive to the stock forum governance effect. Our results are robust after considering the likelihood that executives will account for stock forum discussion in their reporting decisions. |
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