Climate disasters and earnings management

Abstract

This study examines whether managers use earnings management to manipulate earnings after climate disasters and how they choose different types of earnings management to achieve earnings targets. Using a large sample of climate disasters from 1989 to 2018 obtained from the Spatial Hazards Events and Losses Database for the United States (SHELDUS), we find that managers tend to exhibit opportunistic behaviors by using earnings management to adjust earnings upward after climate disasters. In addition, we find that managers favor the use of accrual-based earnings management and classification shifting over real earnings management to achieve earnings goals more quickly. Moreover, we document evidence that the relations between earnings management and climate disasters can be affected by other factors such as firm size, frequency of climate disasters, and institutional environment. Specifically, earnings management employed by managers after climate disasters are more likely to be present in small companies, companies located in states with a lower frequency of climate disasters and states with more corruption.