Natural Disaster Impedes the Corporate Earnings Management in the U.S.

Abstract

We examine the timing and magnitude of earnings management following natural disasters to provide new insights into how and when firms manage earnings. Using difference-in-difference regressions and a sample of U.S. publicly listed firms from 1980 to 2017, we find that natural disasters reduce the magnitude of corporate earnings management by 19.5% in the two-year, post-disaster period. Natural disasters attract the attention of investors and intensify external monitoring, which results in reduced levels of corporate earnings management. In addition, we find increased information disclosure quality following disasters. Our findings of reduced earnings management following negative, external shocks contradict the predictions of big bath accounting practices.