Abstract
Building on the theoretical framework of Heinle and Verrecchia (2016) and the pioneering empirical study of Dang, Moshirian, and Zhang (2015), this paper investigates whether and how commonality in news can influence managers’ incentives to engage in earnings management. We find strong evidence that news commonality reduces managerial incentives to manage earnings. Employing a quasi-natural experiment, we provide plausibly causal evidence that the media can curb earnings management via reporting correlated news between a firm and other firms in the market. This effect is more pronounced among firms that are similar to each other and whose information environment is opaque. We further find that stocks with higher news commonality have smaller earnings response coefficients. These results together suggest that shareholders assign less weight to a firm’s earnings report when they can learn about the firm’s value using the information of other firms, thereby reducing the benefits for managers to engage in earnings management.
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