Natural disasters, unnatural earnings: How do climate disasters impact earnings management?

Abstract

This study examines whether managers engage in earnings management to manipulate earnings following 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 increase earnings after climate disasters. Furthermore, we find that managers prefer using accrual-based earnings management and classification shifting over real earnings management to achieve earnings goals more quickly. Moreover, we document evidence that the relationship between earnings management and climate disasters can be influenced by other factors such as firm size, frequency of climate disasters, and local institutional environment. Specifically, we find that earnings management employed by managers after climate disasters are more prevalent in smaller companies, companies located in states with a lower frequency of climate disasters, and in states with higher corruption levels.