The Impact of Customer Attention on Aggressive Financial Reporting

• In Event: Financial Reporting Quality

Abstract

A well-established stream of literature provides consistent evidence that managers make less aggressive financial reporting decisions
when attention or monitoring by outside parties increases (e.g., auditors, analysts, debt holders, etc.). We extend this line of research
by examining how managers respond to attention from a previously unexamined group: customers. In stark contrast to prior research, we find that managers are more aggressive in their financial reporting decisions when more customers are paying attention to their firm. Additional analyses provide evidence that our results are robust to a variety of measures of aggressive financial reporting, adjustments for selection bias, and propensity score matching, and are not explained by customer concentration, management compensation incentives, firm visibility, or attention by the outside parties examined in prior literature. These results provide important empirical evidence of a previously undocumented
motivation for managers to make aggressive financial reporting decisions: customer attention.

Authors

• Michael Drake, Brigham Young University

• Timothy Andrew Seidel, Brigham Young University

• Brady Twedt, Indiana University - Bloomington

• David A Wood, Brigham Young University