Does National Insecurity Motivate Ambiguous Financial Reporting? An Insight Into Terrorism

Abstract

Terrorism brings forth social disorder and obstructs economic activities at both macro- and micro-level. This study examines the quality of corporate financial reporting under the influence of terrorism among U.S. listed firms. Using the fixed effect estimator in a sample stretching from 2007 to 2020, I document that firms employ greater accruals in the face of terrorism, and accruals extend in both directions. This negative association stay robust with different model specifications and endogeneity diagnoses. The state-level analysis supports this inverse relationship by revealing a larger decline in earnings quality among firms located in states where terrorist attacks take place. The channel analysis shows that corporate monitoring efforts, including board diligence, ethical values, and market attention, serve as a channel which transmits the impact of terrorism to corporate earnings quality. Additionally, economic sanction imposition from the U.S. government also curtails the detrimental effect of terrorism on firms' earnings quality. This study's findings shed light on corporate responses to terrorism threats through the financial reporting lens and suggest some implications as well as future research directions for interested scholars.