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Do Media Help Deter Financial Misreporting? Open Access

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This paper investigates the role of the media as an external deterrence mechanism for firms’ aggressive reporting practices. Using a sample of firms that filed income-decreasing annual restatements due to financial frauds, irregularities, and misrepresentations between 2000 and 2011, and a matched control sample, I provide evidence that the more media coverage a firm receives in the previous year, the lower likelihood of subsequent misstatements. I then distinguish positive tone from negative tone to examine whether the tone of media content affects firms’ incentives to misreport. I find that negative tone of media articles is significantly negatively associated with the likelihood of subsequent misstatements, whereas positive tone does not appear to be significant. This paper further examines the relative importance of the deterrence roles that the media and analysts play in firms’ misstatement behavior, and find that the media play a more important role than financial analysts, although the roles of these two mechanisms are overlapping to some degree.

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