6 Conclusion
Miller and Skinner (2015) note that “It is now clear that the role of the media is of interest in its own right, especially if it does more than simply disseminate news. One promising approach is to consider the media’s interaction with other players in financial markets, such as analysts, auditors, investors etc. While some research on the media has occurred, this area is still relatively undeveloped” (p. 232). This paper considers the role of the media in preventing two types of earnings management around SEOs: accrual-based earnings management and real activities manipulation. After establishing a relationship between the media and earnings management, it further studies the differential roles of media and auditors in enhancing the earnings quality. Prior literature demonstrates that media coverage can serve as a “watchdog” and prevent financial misreporting and fraud (Miller, 2006; Kuhnen and Niessen, 2012; Dai et al., 2015). Alternatively, prior research also suggests that the media can “force” a manager to manage earnings by placing the manager in the spotlight, creating high expectations, and adding to the manager’s overconfidence (Schrand and Zechman, 2012; Hribar and Yang, 2016). Using a sample of SEOs from 1993 to 2014 and news coverage data from the FactSet database, this study shows that the media effectively reduces REM but is inefficient in preventing accrual-based earnings management in both the fiscal year prior to and the one following the SEO. However, the results are the opposite for auditors: while auditors are effective in reducing accrual-based earnings management, they actually increase REM. This happens because REM is not easily detected by auditors and regulators (Graham et al., 2005) and is chosen by managers during times of high scrutiny (Cohen et al., 2008). This is, to the authors’ knowledge, the first study to highlight the role of the media as an REM “watchdog” around SEOs. It further demonstrates that auditors and the media complement each other in preventing different types of earnings management: While auditors effectively reduce accrual-based earnings management, the media’s role is to prevent earnings management in the case that stymies auditors, namely, real activities manipulations. This finding enriches our understanding of how multiple parties influence managers’ earnings management decisions.
