The spillover effect of shareholder activism: Evidence on firm reporting |
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| Institution: | 1. School of Management, Xi’an Jiaotong University;2. Department of Accountancy, City University of Hong Kong;1. Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland, OH 44106, United States;2. Department of Economics and Accounting, Hunter College, City University of New York, New York, NY 10065, United States;3. Georgia Institute of Technology, United States;1. Memorial University of Newfoundland, Canada;2. Stony Brook University, USA;1. Hanyang University, Republic of Korea;2. Seoul National University, Republic of Korea;1. Emeritus Professor, The University of Akron, United States;2. Department of Accounting & Finance, Coggin College of Business, University of North Florida, United States;1. Business School, Korea University, Seoul 02841, Republic of Korea;2. Lundquist College of Business, University of Oregon, Eugene, OR 97403, USA;3. College of Business Administration, Loyola Marymount University, Los Angeles, CA 90045, USA |
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| Abstract: | This study examines the spillover effect of shareholder activism against target firms on financial reporting by non-target firms in portfolios held by the same activist shareholders. We find that firms that are not the target of institutional shareholders’ activism campaigns report more positive abnormal accruals. Cross-sectional tests indicate that the effect is more pronounced i) for firms that have more opportunities to engage in upward earnings management, or for firms with less effective alternative monitoring forces, and ii) when investors are more sensitive to good news. We also find that the effect is stronger when activist shareholders are more experienced, are waging more confrontational campaigns against target firms, and have larger holdings in non-target firms. We further find that non-target firms tend to report lower magnitude of asset write-downs, are more likely to restate financial statements and meet or beat earnings benchmarks, and exhibit a more optimistic tone in their 10-K/10-Q filings. Overall, our findings suggest that firms tend to window-dress their mandatory reporting to preempt possible shareholder activism against them. |
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| Keywords: | Shareholder activism Earnings management Spillover effect D83 G14 G23 M41 |
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