Can investor communications discipline corporate misconduct? Evidence from a field experiment

  • Chen XU

Student thesis: MPhil Thesis (Lingnan)


Corporate misconduct encompasses deceptive or fraudulent activities carried out by company members. Such misconduct can distort the accuracy of firm valuations and mislead investors. Researchers and regulators have worked diligently to understand the factors driving corporate misconduct and devise strategies to reduce its prevalence. However, causal evidence remains limited. In this study, we conduct a field experiment to address this issue and investigate potential methods for mitigating corporate misconduct. Recent studies have emphasized the role of investor communications in governance, as they improve transparency and decrease information asymmetry between managers and investors. This study investigates the disciplinary power of two channels of investor communication: investor relations (IR) and social media platforms. Specifically, we investigate whether accusations made through IR and social media, or the interaction between them, can help curb firms’ earnings management, a notable aspect of corporate misconduct.

To answer the research question, we focus on firms with discretionary accruals in the top one-third (i.e., a high level of earnings management or corporate misconduct) among publicly listed firms in the US market. We accuse high earnings management by sending emails to the firms' Investor Relations (IR) departments and posting on social media. Specifically, we randomly divide firms with high earnings management into five groups. The first (T1) and second (T2) groups receive standalone email and social media accusations, respectively. The third group (T3) receives both accusations simultaneously. The fourth group (T4) is identical to the third group, except that we also include a statement in the email informing the firms about the social media accusation. The final group (C) receives no message, serving as the control group.

We find that, compared to the control firms, firms receiving the treatment of email accusations experience a significant decline in earnings management in the post-treatment period. We find no significant treatment effect for the social media accusation. Interestingly, however, we find that additionally informing the firms about the social media accusation enhances the treatment effect of email accusations. The results suggest that private accusations could be more effective than public accusations of corporate misconduct, as firms might overlook the latter or be unable to effectively integrate public opinion. The treatment effects remain robust across various specifications and are stronger in firms with a better-functioning investor relations (IR) system. Furthermore, we find that treatment effects increase with firms' financial distress and managers' career concerns. Overall, we identify a new factor that has a causal effect on firms' earnings management and suggests that disciplining firms through private channels is important.
Date of Award28 Jul 2023
Original languageEnglish
Awarding Institution
  • Lingnan University
SupervisorLai WEI (Supervisor) & Xiaofeng ZHAO (Co-supervisor)

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