New York, New York: A recent study published in the British Accounting Review suggests that businesses tend to exercise greater caution in their financial reporting following a terrorist attack or mass shooting. The study, conducted by Seda Oz, an assistant professor of accounting at the University of Waterloo in Canada, found that companies located in areas affected by such events tend to display a decline in accrual-based and real earnings management, as well as pessimistic risk assessments of their financial reporting choices.
Oz examined over 47,000 yearly reports from more than 5,600 companies and 716 major attacks in the U.S. between 2000 and 2020. The study used data from sources such as the Global Terrorism Database and Mother Jones, along with corporate data from databases like Compustat and EDGAR. The research found that companies close to the location of such events were less likely to manipulate their financial figures and were more transparent in their financial reporting, especially those with more cautious annual reports and those that typically don’t share much information with the public.
The study also suggests that emotionally impactful events, such as terrorist attacks and mass shootings, can influence managers when making financial decisions by increasing their perceived probability of risk and negative future events, leading to cognitive biases that affect their financial reporting choices. Oz believes that these reporting changes could be crucial in predicting a company’s future performance and investment risk. Policymakers may want to consider introducing mandatory stress tests or enhanced disclosure requirements for businesses in regions experiencing a terrorist attack to help maintain market stability and investor confidence.
The findings of the study point towards the need for companies to reconsider their internal policies to account for psychological effects, which could result in more ethical business practices and improved regulations in the future. Overall, the study highlights the impact of traumatic events on financial decision-making and raises questions about how businesses can adapt to minimize risks and maintain transparency in their reporting amidst such circumstances.