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The Effect of Creative Culture on Aggressive Financial Reporting

Sat, October 10, 10:30am to 12:00pm, TBA

Abstract

Chief Executive Officers identify creativity as the leadership competency most desired in business today (IBM 2010). As companies recognize the benefits of creativity and innovation, managers are increasingly looking to build creative cultures within their organizations. However, research in psychology suggests that there may be unintended negative consequences to these attempts. In this study, we predict and find that innovative company culture primes creative thought and, in turn, leads to higher levels of real earnings management (REM) behaviors. Using construal level theories of psychological distance proposed by Trope and Liberman (2010), we design and test both a lower-level and a higher-level construal-based intervention to reduce real earnings management in these cultures. As we predict, a lower-level construal intervention reduces REM behaviors, but a higher-level construal-based intervention reduces REM behaviors to a greater extent. Our findings have implications for diverse groups of business professionals. For example, identifying negative unintended consequences of creative corporate culture can help management more effectively assess risk across the organization. Also, the findings of this study could provide external auditors with information about client risk as early as the client acceptance stage of the audit. The study’s findings also inform boards of directors and audit regulators of a potential indicator of lower earnings quality. In addition, we contribute to the emerging accounting literature regarding real earnings management behaviors and to the psychology literature addressing the link between self-interested behavior and creativity, as well as to research examining the effects of construals on decision making under uncertainty.

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