Misleading Investors Research Articles

Under Armour: Revenue Pull Forwards and Disclosure Failures

This case examines a recent SEC settlement with Under Armour, a public company traded on the NYSE, that was charged with misleading investors and failing to disclosure uncertainties relating to its reported revenues. Under Amour was not able to meet analysts’ sales projections for several consecutive quarters in 2015 and 2016 and resorted to “pulling forward” revenue from future periods in order to meet these estimates. More than $408 million was pulled forward, and during this time Under Armour continued to credit its growth to apparel, footwear and other new offerings. The case was settled in May 2021 and Under Armour paid a $9 million penalty. The case spotlights several important accounting and ethics issues in the context of a real, multi-national company that most college students are familiar with. From an accounting perspective, the revenue pull forwards, manipulation of payment terms and omission of material facts in financial reporting are discussed. From an ethics perspective, a discussion is included on the timing of reporting “earned” revenue, the legality of inducing customers to accept early shipments and the difference between omitting information and misleading investors.

DEVELOPMENT OF SCIENTIFIC AND METHODOLOGICAL PRINCIPLES FOR PREVENTING ESG-MIMICRY BY BUSINESS ENTITIES

The scientific article examines the issues of destructive phenomena in society, the creation of information asymmetry and the distortion of the actual state of affairs, disinformation for obtaining illegal competitive advantages, image improvements and access to ESG-investments, which nullify efforts to achieve the goals of sustainable development (SDG), introduces misleading investors and discredits the essence of ESG activity of enterprises/companies and is a direct deception of consumers and other stakeholders. The concept of ESG-mimicry is defined from the point of view of the actions of enterprises/companies aimed at creating false, false information about its corporate responsibility, environmental and social activity. Studying the basics of ESG mimicry, as well as its application, gives enterprises/companies a clear understanding of the consequences of its influence. It is the awareness of this aspect that creates a fundamental basis for successful management of ESG-mimicry, which consists of certain elements: ensuring information transparency of the enterprise/company; active communications with stakeholders, since, as a rule, it is precisely in these areas of activity that ESG-mimicry appears most often, and here an important element is control over communications in the form of an ESG audit, internal (independent directors of enterprises/companies) and external mechanisms ( ESG labeling). The main methods of manipulation and forms of ESG mimicry are considered and characterized. Based on the results of the study, measures to prevent them were developed and proposed, as well as basic methods of combating ESG-mimicry in terms of stakeholders were proposed. The conducted research made it possible to propose scientific and methodological principles for combating ESG-mimicry, which include the definition of forms and methods of ESGmimicry, the main negative consequences of its use for the enterprise/company, and recommendations for preventing ESG-mimicry.

Auditor Materiality Disclosures and Investor Trust: How to Address Conditional Risks of Disclosure Mandates

ABSTRACT This study contributes to the literature examining the benefits and costs associated with auditor quantitative materiality disclosures. We conduct an experiment to examine a conditional risk associated with such disclosures: that investors with heightened concerns about earnings management, a qualitative concern, will anchor too strongly to the quantitative threshold and lose trust in the audit. The experiment manipulates (1) whether investor concerns about earnings management are low or high and (2) whether auditors provide a quantitative materiality disclosure. We find that quantitative materiality disclosures mislead investors when they have high concerns about earnings management. Specifically, investors lose trust in the auditor’s ability to identify errors that are quantitatively small, but important from a qualitative perspective. A second experiment further suggests that auditors’ provision of detailed, rather than nominal, qualitative materiality disclosures can mitigate this conditional risk. Our study contributes to practice and literature on financial disclosure, materiality, and investor behavior. Data Availability: Data are available from the authors upon request.

Greenwashing or Definitional Disagreement? Coming to Terms with Sustainable Investing

Greenwashing is perceived to be a problem for sustainable investing. In a relatively new and rapidly growing field, however, claims of greenwashing are often less about asset managers misleading investors and more about unsettled definitional disagreements. Investors should be aware of this when encountering greenwashing claims and develop an understanding of the three main rationales for sustainable investing: values alignment, ESG integration, and impact. By providing investors the means to evaluate sustainable investments and their own sustainability preferences, this can reduce the mismatch between investor expectations and what sustainable investing products deliver, thereby reducing the perception that greenwashing is rampant.

Validity of Forex Trading Agreements Using Foreign Currency as the Object of Investment

Forex (Foreign Exchange) is better known in Indonesian as Forex trades between two currencies from two countries by many States Parties, institutions and individuals. Forex trading between market players that lasts Open 5 days a week, 24 hours a day. inner consistency Forex trading operations based on Article 1338 of the Legislative Code Civil. These provisions are less effective because there are still many brokers illegal brokers, unlicensed and unscrupulous companies with the intention of misleading investors. Due to the futures trading law Commodity has not yet implemented a complete forex trading system.Speaking of validity foreign exchange investment contract based on article 1320 of the civil code on the conditions of validity of the contract, foreign exchange as the object of the contract, not contrary to the objective conditions which have legal consequences, null and void history and characteristics of book iii of the civil code which regulates the commitment is open, so it is allowed to make one agreements other than those provided for in the civil code, provided that they are not contrary with the law, public order and good morals. This research advising the government and the legislator to make regulations related toforeign exchange investment regulations to prevent things that are not legal protection desired and guaranteed for investors

The long-run abnormal returns and the subsequent SEO characteristics of profit-exempted IPO firms in Taiwan

<p>The deregulation of IPO requirements changes the industrial structure. Focusing on Taiwan’s unique profit-exempted IPO requirements, this study confirms that deregulation not only leads to IPO clustering, but also to a concentration in chemical and bio-pharmaceutical industry. The profit-exempted IPO issuers actively release optimistic information about future growth and take advantage of overvaluation to increase IPO revenue by misleading investors into mispricing the IPO. This results in poor long-run abnormal stock returns when stock price reverses after the IPO to correct the mispricing. In addition, some profit-exempted companies continue to use mispricing to raise equity capital and issue new shares after the IPO. For profit-exempted IPO companies, the characteristics of seasoned equity offerings within three years after IPO are significantly different from other companies. They are more likely to issue shares after IPO with shorter interval, larger size, and more frequent than non-profit exempted IPO firms. This study finds that the phenomenon of profit-exempted issuers raising capital is more consistent with the market timing theory.</p> <p> </p>

How does the stock market manipulation affect the emerging market in developing countries?

Due to the expansion of stock markets in developing countries and the large number of buyers and sellers seeking to benefit from their dealings, manipulation has become more sophisticated. Forgers may influence the stock market by creating a false impression, misleading investors, and convincing them to buy their stocks. Because it could make investors anxious about the market, market manipulation serves as a barrier to market depth. People must be aware of these challenges, take additional measures, and abide by certain norms and special legislation in order to deal with this issue without impairing investors' judgment and exposing them to deceptive pricing.

Behavior and Consequences of COVID-19-related Voluntary Disclosure: Evidence from Pharmaceutical Companies

With the explosion of COVID-19, a number of publicly traded companies in the pharmaceutical industry have thrown themselves into the development of novel coronavirus vaccines and therapeutics, and have voluntarily disclosed information about the development process. In this paper, six companies with different quality ratings of information disclosure in the pharmaceutical industry (refer to the results of the 2019 Shenzhen Stock Exchange quality assessment of information disclosure) were selected to explore the behavior and consequences of voluntary disclosure of information by listed companies in the pharmaceutical industry in China. The results show that voluntary disclosure of positive news will have a positive impact on the company’s share price. Companies with high disclosure quality ratings have lower price volatility before and after disclosure. Low-rated companies have volatile stock prices before and after disclosure, and the price gains are unsustainable for long periods of time, even falling back to lower levels than they were before disclosure. It is not the case that companies’ share prices do not fluctuate due to poor disclosure appraisal results, but rather they may cause a larger market reaction for the purpose of misleading investors. To some extent, this paper enriches the research on voluntary information disclosure of listed companies and will make listed companies understand the consequences of voluntary information disclosure on COVID-19-related issues, provide evidence for relevant supervisory authorities to regulate voluntary information disclosure further, and create a better voluntary information disclosure environment for China’s stock market.

Competition and Product Quality: Fake Trading on Crypto Exchanges

How competition affects product quality and how product quality choices impact firms' operating performance are open empirical questions. We use a setting that is especially suitable to answering these questions: cryptographic exchanges, on which product quality is inversely related to fake (inflated) trading volume. We examine the effects of competition among crypto exchanges on their trading volume inflation and the impact of fake trading on exchanges' operating performance. We develop statistical measures to detect fake trading, which we validate in several ways and use in analyzing determinants and consequences of trading volume inflation. Various static and dynamic competition measures are positively associated with measures of fake trading at both the exchange and exchange-currency pair levels. Exchanges that inflate trading volume tend to succeed in misleading investors in the short run but are punished in the long run, consistent with the tradeoff between short-lived increases in rents and future losses due to damaged reputation.

Venator accused of misleading investors regarding impact of Finnish TiO2 plant fire

Venator accused of misleading investors regarding impact of Finnish TiO2 plant fire

Issues with Public Disclosure of Non-GAAP Financial Metrics

The use of non-Generally Accepted Accounting Principles (non-GAAP) metrics by firms has increased dramatically in recent years. However, the regulatory structure for ensuring these metrics do not cross the line from appropriate discretion by managers to misleading investors has not kept pace. The last major pronouncement from the SEC addressing the disclosure of non- GAAP metrics was several years ago and has only been supplemented with unofficial clarifications to deal with highly technical aspects of securities laws. This paper examines the widespread usage of non-GAAP metrics and why the current lack of regulation with regards to disclosure of these data in unofficial settings, such as social media, is a problem that regulators need to address for protection of the investing public.

Did that meeting discuss ‘inside information’? Insights from the USA and EU on when confidential information becomes material

This paper aims to provide insights into the moment in which a piece of information becomes ‘inside information’; that is, information that cannot be abused by trading in the market, what in the USA is called ‘material non-public information’. In the EU, the notion of ‘inside information’ is also relevant to establish the disclosure duties for listed companies, which have to publish such information almost immediately (‘as soon as possible’), unless several conditions that allow the delay of disclosure are continuously met. In addition, if listed companies decide to delay, they have to record inside information, protect it, establish and update an ‘insiders list’, suspend buy-back programmes and monitor that the delay of disclosure does not result in misleading investors. Therefore, in such a framework, a crucial question listed companies have to ask themselves is whether confidential information circulating within the company is already ‘inside information’ or not. In this respect, owing to the twofold notion of inside information, an analysis of US cases of insider trading investigated by the Securities and Exchange Commission (SEC) over the decades is addressed here and insights from the related economic literature are offered in order to develop a concrete understanding of when information becomes ‘inside information’.

Myopic Managers and Their Foresighted Excuses: Mitigating Downsides of Pre-IPO Earnings Management

In spotlight of the IPO, a major proportion of firms artificially inflates present earnings by making unjustified budget cuts. In doing so, firms successfully impress investors in the short run, but adversely affect firm value for several years causing a negative net effect, which makes myopic management an important subject to research. However, it is yet to be answered which mitigating actions managers take to avoid being blamed for the future downsides of their myopic actions. Thus, building on agency and attribution theory, we examine if firms misleading investors trough myopic management try to obscure this practice and reject responsibility by claiming excuses for expected negative consequences before these occur (i.e., “self-handicapping”). Merging secondary IPO data with longitudinal company data and manually extracted information from IPO prospectuses, we obtain a sample with 591 firm-year observations of 197 US firms going public between 2006-2013. We find that firms engaging in myopic management are indeed prone to self-handicap, especially if they are risk averse and face investors’ scrutiny. Our study reveals that myopic management is not truly short-sighted, but rather a multi-level strategy to mislead investors around IPOs. We discuss theoretical and practical implications, and suggest avenues for further research.

How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model

ABSTRACTThis paper uses data on detected misstatements—earnings restatements—and a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm's stock price by misstating earnings. I find the CEO's expected cost of misleading investors is low. The probability of detection over a five‐year horizon is 13.91%, and the average misstatement, if detected, results in an 8.53% loss in the CEO's retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60%, with 2%–22% of CEOs starting to misstate earnings in each year 2003–2010, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs manipulate less, and the average misstatement is larger in smaller firms.

Accessing capital markets: Aristocrats and new share issues in the British bicycle boom of the 1890s

The article reconsiders the mid-1890s boom in which a large number of firms in the bicycle, pneumatic tyre and related industries were floated. It investigates why so many of these issues featured aristocratic directors in their prospectuses and finds that they represented social connections that were a necessary condition for regional industrial firms to gain a London listing. The case shows that the role and value of these directors was to access capital markets and financial resources, as opposed to a temporary aberration designed to inflate share prices and mislead investors.

Pro Forma Earnings Presentation Effects and Investment Decisions

ABSTRACTReacting to the criticism that companies routinely mislead investors by emphasizing non-GAAP or pro forma numbers, the SEC promulgated Regulation G in 2003, which requires firms to provide a reconciliation of the pro forma and GAAP numbers. In this study, we conduct an experiment to examine how investors' GAAP and non-GAAP earnings performance assessments affect their financial evaluations and investment decisions based on the presentation format of the reconciliation (presenting a full non-GAAP income statement, referred to as the full NGIS format, versus presenting only the items that caused the difference between GAAP and non-GAAP measures, referred to as the summary NGIS format). We find that even though a summary NGIS format for the reconciliation of pro forma earnings does not increase the perceived non-GAAP earnings performance, it does increase the weight given to non-GAAP earnings performance when making investment-related judgments and decisions, relative to a full NGIS format. These findings regarding the evaluation and weighting of non-GAAP earnings performance extend prior studies and suggest that non-GAAP earnings information may be processed differently based upon the format of the reconciliation. Further, our finding regarding the weighting of non-GAAP earnings performance is inconsistent with the concern expressed by the SEC that the full NGIS format may give greater prominence to non-GAAP information. Finally, the implications of these findings for regulators, investors, and future research are discussed.Data Availability: Contact the authors.

Different means of earnings management of owner-managed firms versus agent-led firms: evidence from chaebols in Korea

This paper examines the earnings management behavior of large, family-controlled business groups (so-called ‘chaebol’) in Korea from 2006 to 2010. Specifically, the author studies whether the methods of earnings management are different between chaebol firms versus non-chaebol firms. The author finds no significant difference in accrual-based earnings management by these two types of firms. However, the author shows that chaebol firms’ real-based earnings management is greater than non-chaebol firms, based on their higher abnormal production costs and lower abnormal discretionary expenses, in order to manipulate accounting income upward. The results suggest that owner-managed firms tend to choose real manipulation which negatively affects future corporate performance and consequently mislead investors about the firm value

The informativeness of non-GAAP earnings after Regulation G?

This study explores the possibility that managers mislead investor perceptions through the disclosure of non-GAAP earnings even after SEC intervention (Reg G). We find that, on average, some higher qualities of exclusions, such as nonrecurring items, are moved from GAAP earnings to arrive at non-GAAP earnings. However, net income-decreasing other exclusions most related to recurring items are negatively associated with future operating income. Thus, managers still manipulate non-GAAP earnings to exclude certain recurring items from non-GAAP earnings even when reporting on the reconciliation table. We further use CEO and CFO selling shares as the key factor to test whether top executives convey good information to affect the firm's stock, and then mislead investors through disclosing non-GAAP earnings. We find that a CEO or CFO who sells their shares during the two weeks after the earnings announcement date is more likely to disclose non-GAAP earnings. Additionally, the negative correlations between other exclusions and future operating incomes for cases with executives’ sales are more significant than those for cases without executives’ sales. That is, even after SEC intervention, managers may disclose non-GAAP earnings to mislead investors' and garner private benefits.

Mandatory Preliminary Performance Reports: Evidence from China

ABSTRACT Companies listed on China's Shenzhen Stock Exchange Small and Medium Enterprise Board are required to release preliminary performance reports before the end of February if they cannot file annual reports by that time. Although this mandate might improve the timeliness of information, we find that such preliminary releases are inaccurate and optimistic, potentially misleading investors. Sixteen percent of preliminary reports contain significant inaccuracies (i.e., when actual numbers deviate from preliminary ones by at least 10 percent). Firms in earlier stages of the auditing process, as well as those with low-quality preliminary reports in prior years, poorer performance, greater accounting complexity, and fewer resources, are more likely to issue low-quality preliminary performance reports. Market reaction tests indicate that investors consider preliminary releases to be informative and generally cannot differentiate between high-quality and low-quality preliminary releases. Moreover, when annual reports are filed, investors are surprised by the differences between the annual reports and the preliminary reports. Thus, our paper demonstrates that mandatory disclosure requirements may have unintended negative consequences.

Catch and Release

Catch and Release