How do reporting frequency and analyst perceptions of RAM influence manager real activities manipulation behavior?

Transcription

1 How do reporting frequency and analyst perceptions of RAM influence manager real activities manipulation behavior? I. INTRODUCTION Numerous accounting research demonstrates that managers face incentives to manipulate current period earnings at the expense of future period earnings (e.g., Healy and Wahlen 1999; Cohen, Mashruwala, and Zach 2010). Incentives may arise when contractual obligations (e.g., debt covenants), manager compensation (e.g., accounting-based bonus program), and job security are tied to current period earnings or because outside investors and analysts form their expectations of future earnings based on firms current period accounting performance (Mizik and Jacobson 2007; Kim and Sohn 2013). Earnings can be manipulated based on two different approaches: Accrual-based earnings management (AEM) and real activities manipulation (RAM). AEM involves exercising discretion over accrual choices that are allowed under Generally Accepted Accounting Principles (GAAP) to achieve a desired earnings target (Kim and Sohn 2013; Ge and Kim 2014). This approach typically occurs towards at the end of an accounting period, has no direct effect on cash flow, and is more likely to draw auditor and regulator attention. RAM, on the other hand, entails real business operations deviated from normal business practices to boost current accounting performance. For instance, managers might artificially inflate current-period performance by boosting sales through limited-time discounts, cutting discretionary expenditures (e.g., R&D and advertising expenses), or overproducing inventory to reduce cost of goods sold. In recent years, RAM has received increased attention in accounting research for several reasons. First, RAM is increasingly being used by managers to manipulate earnings. For 1

2 example, Cohen, Dey, and Lys (2008) find that there is a significant increase of RAM in the period following the implementation of the Sarbanes-Oxley Act in Moreover, a survey from Graham, Harvey, and Rajgopal (2005) shows that 78% of the executives interviewed are more willing to meet short-term earnings target via RAM rather than AEM. Second, unlike AEM, RAM tends to have direct economic consequences. While limited research shows positive consequences from RAM, accounting literature largely documents negative long-term consequences stemming from the use of RAM (e.g., Cohen et al. 2008; Cohen and Zarowin 2010; Graham et al. 2005; Zang 2012). Third, RAM involves real business operations and can be easily camouflaged as normal business activities (Kothari, Mizik, and Roychowdhury 2015). Thus, RAM is opaque to outside stakeholders and more difficult to detect compared to AEM (Kim and Sohn 2013). Despite the increasing interest in, and importance of, RAM, little research to date has examined methods to deter the use of RAM by mangers. Accordingly, this study investigates the hitherto unexplored questions of whether increased financial reporting and informing managers of the adverse consequences of RAM would reduce the use of RAM by managers for earnings manipulation. While current reporting systems in the US mandate quarterly financial reporting, advances in information technologies make more frequent dissemination of financial information (or even real-time reporting) a realistic possibility (Tang et al. 2016). Increased financial information is believed to reduce information asymmetry between firms and investors and other stakeholders. Equipped with increased financial information, investors and other stakeholders are more likely to discover mangers real intention and detect RAM by managers (Tang et al. 2016). In fear of RAM being detected by others, managers might be less likely to engage in RAM if increased financial information is disclosed. 2

3 In addition to examining the effect of increased financial reporting, we investigate whether informing managers of the adverse consequences of RAM reduces the use of RAM by managers. While the majority of the research suggests that RAM has adverse long-term economic consequences, survey evidence shows that managers believe that earnings manipulation enhances investor evaluation of their firms (De Jong et al. 2014). The lack of knowledge regarding the negative impact of RAM on firms may further encourage managers to engage in RAM. Prior research indicates that financial analysts feel negatively about RAM (De Jong et al. 2014; Tang et al. 2016). Thus, it is important to educate managers and inform them of the negative perceptions of RAM by analysts. Informing managers of the negative perceptions of RAM by analysts may prompt managers to reconsider RAM from a more comprehensive perspective and thus reduce the likelihood of engaging in RAM. We conducted an experiment using a sample of 73 corporate managers to examine the effects of 1) reporting frequency and 2) informing managers that financial analysts view RAM negatively on managers likelihood to engage in RAM. Our results indicate that more frequent financial reporting and informing managers that financial analysts view RAM negatively reduce managers likelihood of engaging in RAM. Participants reported a significantly lower likelihood of recommending a sales discount to boost earnings when they were informed that financial analysts view RAM negatively and when the firm provided more frequent disclosure of sales information. In addition, we found a significant interaction between reporting frequency and the knowledge that analysts view RAM negatively. Specifically, informing managers of the negative perception of RAM by analysts results in a greater decrease in the likelihood of RAM when the firm provides more frequent disclosure than when the firm provides less frequent disclosure. 3

4 Literature Review and Hypothesis Development Real Activities Manipulation Real activities manipulation (RAM, and sometimes referred to as Real Earnings Management ) is defined as departures from normal operational practices, motivated by managers desire to mislead at least some stakeholders into believing certain financial reporting goals have been met in the normal course of operations (Roychowdhury 2006, 337). Unlike accrual earnings management (AEM), RAM involves manipulation through real or common business activities, such as cutting discretionary expenses (e.g., R&D and advertising), overproducing inventory (to reduce cost of goods sold), delaying certain investments, timing fixed asset sales to influence gains or losses, and enhancing sales through unusually heavy discounts or lenient credit terms. Managers are expected to make appropriate operating decisions given the economic circumstances the firm is facing (e.g., Jensen and Meckling 1976). Engaging in RAM is a deviation from appropriate operating decisions. As noted by Roychowdhury et al. (2012), GAAP provides a benchmark for accounting principles that are enforced by regulatory agencies, but there is no such basis for real operations. Thus, RAM is a less transparent method for managing earnings compared to AEM. Since the Sarbanes-Oxley Act of 2002, firms have increased their use of RAM and effectively substituted some AEM activities for RAM (e.g., Cohen et al. 2008; Ewert and Wagenhofer 2005; Bartov and Cohen 2009; Kim et al. 2012; Zang 2012). Thus, RAM is becoming increasingly prevalent. To this point, Bartov and Cohen (2009) state that with regard to meeting earnings targets post-sox, investors and other capital market participants should 4

5 pay more attention to real earnings management activities (508). Extant survey evidence shows that financial executives have a greater willingness to manipulate earnings via real activities rather than through accruals (Bruns and Merchant 1990; Graham et al. 2005). According to the Graham et al. (2005) survey, executives indicate a willingness to sacrifice economic value in order meet earnings targets. Managers in the survey indicate a strong inclination to engage in RAM, with 80 percent reporting they would decrease discretionary expenses to meet a current earnings target. Of interest to the current study, almost 40 percent of managers indicate that they would provide incentives to customers to buy more product in the current quarter in order to meet earnings targets. While RAM activities can be detrimental to long-term firm value, executives believe they are choosing the lesser evil by sacrificing longterm value to avoid short-term turmoil from a negative earnings surprise (Graham et al. 2005, 5). Reporting Frequency Due to rapid changes in the business environment and intensified competitions from global markets, investors and other stakeholders are increasingly demanding more frequent (or even real-time) business reporting to make timely and informed decisions. Regulators have also encouraged firms to disclose more timely information to increase transparency (SEC 2000; FASB 2000). In response to the call of investors, regulators, and other stakeholders, many companies are voluntarily disclosing an extensive amount of business information in a timely fashion. For example, some companies have begun to disclose timely information about sales, products, operations, and financial performance (FASB 2001). At the end of the spectrum, firms, such as Cisco, have already adopted real-time internal-reporting (Pitre 2012). 5

6 The recent advances in information technologies, such as enterprise resource planning (ERP) systems and extensible Business Reporting Language (XBRL), have also provided the means to meet the ever-increasing demand for more timely information (Chan and Wright 2007; Lee, Chung, and Kang 2008). While technology is no longer a constraint for the implementation of increased business reporting, it is still unknown whether more frequent disclosure of financial information would actually benefit financial information users and improve their decision making (Fu, Kraft, and Zhang 2012; Tang, et al. 2016). On one hand, some literature suggests adverse effects of more frequent disclosure of financial information as it may induce greater earnings manipulation and myopia in managers investment decisions (Arif and De George 2016; Kraft, Vashishtha, and Venkatachalam 2016). In addition, more frequent reporting may cause cognitive overload and result in less accurate and more dispersed predictions of earnings (Pitre 2012). On the other hand, some research indicates that increased financial reporting could improve the information environment by reducing information asymmetry (e.g., Healy, Hutton, and Palepu 1999; Leuz and Verrecchia 2000; Botosan 1997; Eaton, Nofsinger, and Weaver 2007; Van Buskirk 2012) and mitigate corporate myopia by encouraging investment in long-term projects (Kraft, Vashishtha, and Venkatachalam 2016). The current study contributes to the debate by examining the potential role of increased financial disclosure in changing manager behavior. Specifically, we investigate whether increased disclosure of financial information deters managers in their use of RAM for earnings manipulation. We propose that increased information disclosure might serve as a monitoring mechanism and deter managers from engaging in RAM. Archival research has already provided broad evidence suggesting that more frequent disclosure reduces information asymmetry. Information asymmetry occurs when one party to a transaction has more or better information 6

7 than the other party (Christozov, Chukova, and Mateev 2006). Information asymmetry, as a natural property of the communication process, is a major concern in any economic transaction. In the firm-investor relationship in particular, the investor is often unable to fully assess the financial condition of the firm due to a lack of information, and thus is at a disadvantage. Increased financial reporting may reduce information asymmetry as it increases the amount of financial information available to information users. With more equal access to information, users are better able to evaluate the financial condition of firms and make better decisions. We contend that increased disclosure of financial information may serve as a monitoring mechanism and deter the use of RAM by managers for earnings manipulation. Increased financial disclosure reduces information asymmetry between managers and investors. Equipped with more abundant and timely information, financial information users are better able to detect RAM (Tang et al. 2016). Managers will expect that the use of RAM is more likely to be detected and there are higher risks associated with the use of RAM for earnings manipulation if increased disclosure is provided. As a result, managers should be less willing to use RAM to manipulate earnings with increased financial disclosure. Therefore, we propose the following hypothesis: H1: Managers in the more frequent financial reporting condition will be less likely to manipulate earnings via RAM than those in the less frequent financial reporting condition; Informing managers the negative consequences of RAM Before managers decide to manipulate earnings via RAM, they need to carefully evaluate the pros and cons of RAM. Managers will engage in RAM unless they believe that the costs of RAM are greater than its benefits. Confirmation bias literature suggests that if decision makers already have a preferred judgment in mind, they are more likely to search for evidences/arguments in support of their preferred judgment. One of the most effective strategies 7

8 for debiasing judgment is to have decision-makers consider the opposite course of action. Therefore, informing managers of the potential negative consequences of RAM might serve as a debiasing tool and reduce managers willingness to engage in RAM. In this study, we investigate whether the knowledge that financial analysts view RAM negatively will impact manager behavior and willingness to engage in RAM. Until recently, it was unclear how financial analysts judge RAM activities. On one hand, accounting literature largely documents negative long-term consequences stemming from the use of RAM (e.g., Cohen et al. 2008; Cohen and Zarowin 2010; Graham et al. 2005; Zang 2012). Many types of RAM set firms up for negative long-term consequences. For example, offering deep period-end sales discounts can have several negative repercussions. As noted by Jackson and Wilcox (2000), providing deep price discounts could lead current customers to expect similar discounts in future periods. Furthermore, these customers might learn to strategically delay future purchases in expectation of another period-end discount. In addition, customers who did not receive discounts may become aware of the discounts that were provided to other customers and demand equivalent treatment. Any of these actions could be detrimental to longterm firm value and lead to reduced margins on future sales (Roychowdhury 2006). In sum, this body of research suggests that analysts may interpret RAM as a negative performance signal. On the other hand, there is limited evidence showing positive consequences from RAM. Specifically, Gunny (2010) examines the extent to which RAM impacts future operating performance and finds that firms engaging in RAM to meet earnings benchmarks have better subsequent operating performance than firms that do not engage in RAM. This suggests that analysts might view RAM use as a positive signal for future performance. 8

9 Recent research addresses the lack of clarity regarding analyst perceptions of RAM and reveals that analysts have an unfavorable view of RAM, which may influence their recommendation decisions. Tang et al. (2016) report that RAM negatively impacts analysts assessment of a company. Specifically, analysts surveyed indicate they are less likely to recommend a company to clients if evidence of RAM is discovered. In a survey of 306 analysts, De Jong et al. (2014) find that analysts perceive RAM activities to be value-destroying. Of particular interest to the current study, over 56 percent of analysts report that it is valuedestroying to incentivize customers (i.e., via deep discounts) to buy more product in order to meet quarterly earnings targets. Furthermore, using a scale from -2 (value destroying) to +2 (value creating), analysts reported when asked to assess the value implications for providing incentives to customers in order to boost sales in the quarter (De Jong et al. 2014). Comparatively, CFOs reported when asked the same question using the same scale (Graham et al. 2005). Thus, while CFOs recognize the ability of RAM to decrease firm value, analysts perceive RAM to be even more detrimental to firm value than CFOs acknowledge. By considering alternative outcomes or counter arguments, decision-makers are less likely to miss other factors that may come into play. Thus, decision-makers that take all relevant factors into consideration form a better judgment. Similarly, informing managers that financial analysts view RAM negatively reminds managers of the potential negative consequences of RAM and should therefore reduce their willingness to engage in RAM. Therefore, we propose the following hypothesis: H2: Managers who are informed of the negative perceptions of RAM by financial analysts will be less likely to manipulate earnings via RAM than those who are not informed; Reporting frequency and the knowledge of negative perceptions of RAM 9

10 It is unknown whether the knowledge that analysts view RAM negatively will impact manager behavior and willingness to engage in RAM. There are obvious incentives for managers to engage in RAM, and there are often direct benefits for managers who engage in RAM and meet earnings targets. De Jong et al. (2014) note that despite analysts unfavorable views of RAM, executives still engage in RAM to meet earnings benchmarks and smooth earnings. The authors attribute this defiance to analysts inability to unravel certain earnings management actions, further noting that analysts cannot always unravel earnings management practices (De Jong et al. 2014). Recent research shows that earnings management is discounted by the capital markets, but only when recognized by equityholders/market participants (Dechow et al. 2010). Given that RAM is especially difficult to detect, managers may be willing to engage in RAM regardless of analyst perceptions as long as they believe analysts cannot detect the behavior. As noted previously, while RAM is generally not considered fraudulent earnings management, it can still have a detrimental impact on firm value. Moreover, management generally has both the opportunity and incentive to engage earnings management activities, which often result in short-term benefits for the firm and managers (Rose and Rose 2008). Staubus (2005) suggests that the only substantial deterrent against such behavior stems from management s fear of being caught and penalized. One could contend that the decision to engage in RAM, while not criminal, is in accordance with deterrence theory (e.g., Perino 2002) and Becker s model of crime and punishment (Becker 1968). According to Becker s economic model (1968), an individual considering illicit behavior considers three primary components in the decision: 1.) the probability of being caught and convicted; 2.) the monetary impact of the punishment upon conviction, and 3.) the gain from committing the act. In our context, if 10

11 managers know that analysts disapprove of RAM and that analysts have the tools to detect RAM (increasing the likelihood of detection), then deterrence theory suggests they will be less likely to engage in the undesired RAM behavior. In this sense, analysts act as a deterrent, analogous to an audit committee/board of directors. We posit that when managers are made aware of analysts unfavorable view of RAM, they will be less likely to engage in RAM activities but perhaps only when analysts have the tools to detect RAM. As noted previously, research consistently suggests that RAM is difficult to detect (e.g., Rowchowdhury et al. 2012; Cohen and Zarowin 2010), and this is a major reason RAM has become more prevalent than accrual-based earnings management post-sox (Cohen et al. 2008). A recent experimental study by Tang et al. (2016) finds that more frequent financial reporting combined with graphical decision aids can assist analysts in detecting sales-related RAM. If managers are aware that analysts disapprove of RAM, but are also aware that analysts cannot detect RAM, managers have no real incentive to reduce their RAM behavior. However, if managers are simultaneously aware that 1.) analysts disapprove of RAM, and 2.) analysts have the tools needed to detect RAM (as in Tang et al. 2016), then these factors in combination may mitigate managers intentions to engage in RAM. This leads to the following hypotheses: H3: The decrease in managers willingness to engage in RAM resulting from informing the knowledge of negative perceptions of RAM will be higher when more frequent disclosure is provided than less frequent disclosure is provided; II. EXPERIMENTAL DESIGN We test our hypotheses using a 2 2 experimental design. 1 The manipulations consist of two between-participants variables: reporting frequency (more versus less frequent financial reporting) and the knowledge of negative perceptions of RAM (participants are informed that 1 The experimental procedures were approved by the internal review board at the authors institution. 11

12 financial analysts view RAM negatively versus participants are not informed that financial analysts view RAM negatively). In the next section we provide details on the participants, treatments, and experimental procedures. Participants Participants 2 were experienced corporate managers recruited from the Institute of Management Accountants (IMA) in the United States. We ed the IMA and asked for their assistance in recruiting experienced corporate managers for our study. The IMA reviewed and approved our instrument and then sent an to IMA members along with a hyperlink to our experiment. One hundred and five responses were received. The average age of the participants was years and 68 participants were males. The mean professional experience was years. Experimental Task and Procedure The experiment was administered online. Controls were built into the online experiment to ensure that individuals could not change answers from previous screens and could not complete the experiment more than once. Participants were randomly assigned to one of the four between-participants treatments and were provided with a decision scenario (see Appendix A). In the scenario, participants were asked to assume that they were a controller of a hypothetic company, Beta Technologies, followed by financial analysts. Currently, the company is voluntarily disclosing its sales revenue information on its corporate website. Beta s financial performance and share price have been improving steadily in recent years. However, due to some unforeseen factors, the company s 2 Due to a lack of enough usable responses from IMA, we also collected data from experienced MBA students at a large public university. Twenty-nine effective responses were received from MBA students; 19 responses passed both manipulation checks and were included in the analysis. 12

13 financial performance is poorer than expected. As it is reaching the end of the accounting year, the company is considering whether to provide a one-time discount, rarely offered in prior years, to boost earnings. By providing the discount, the company is believed to be able to reach its earnings target. Participants were provided with graphic sales data for the most recent three-year period along with the projected sales of the remaining quarter based on the discount offered. The company s sales revenue information was adapted from Tang et al. (2016). The original data exhibited strong four-quarter seasonality except that there was a sharp drop in the last quarter of the last year. Specifically, the sales revenue reported in the last quarter, $2,003.81, dropped from $4, in the previous quarter. In contrast, there were increases from the third quarter to the fourth quarter in the previous years. Expected sales are created by manipulating the sales revenue of the last two weeks and thus pushing the sales revenue of the last quarter up to a normal level of $5, This smoothed the sales revenue of the last quarter, allowing the company to reach its target quarterly revenue forecast. After participants viewed the sales revenue information, they indicated the likelihood that they will recommend the company to provide the above-mentioned discount. In addition, participants responded to manipulation checks, debriefing, and demographic questions. Treatment and Manipulation As previously mentioned, participants were told that the company is currently disclosing sales revenue information through the corporate website. We manipulated reporting frequency (FREQUENCY) by varying the frequency of the sales revenue data disclosed. In the less frequent reporting conditions, participants were told that the company is voluntarily disclosing 3 There are multiple explanations other than RAM for the sales increase that participants observed. However, participants were informed that this behavior could be interpreted by analysts as RAM. 13

14 quarterly sales revenue data in a graphic format. Participants were provided graphic sale data for the most recent three-year period along with the expected sales of the last quarter if the discount is offered. In the more frequent reporting conditions, participants were told that the company is voluntarily disclosing weekly sales revenue data in a graphic format. Participants were provided graphic sales data for the most recent three-year period and expected sales of the remaining weeks if the discount is offered. The weekly sales revenue data were constructed by evenly disaggregating each of the pre-earnings-management quarters into 13-week periods and attaching a small amount of random error (-$50, $50) to the disaggregated data. The random error was constructed to add some fluctuation in weekly sales revenue data. In addition, the expected sales in the last two weeks was created by allocating the difference between pre- and post-earningsmanipulation sales revenue in the last two weeks. In the study, we also manipulated the knowledge that analysts viewed RAM negatively (KNOWLEDGE). In the one treatment, participants were informed that financial analysts feel negatively about RAM and that once RAM is detected, it tends to negatively impact financial analysts assessment of the company. In the other treatment, the above information was not provided to participants. Dependent Variable The primary dependent variable is the assessment of the likelihood that participants would be willing to recommend the discount. Specifically, participants were asked: How likely are you to recommend that Beta provide the 30% discount. The response was on a seven-point Likert scale. 14

15 III. RESULTS Manipulation Checks We asked participants questions to assess whether the manipulated independent variables were recognized correctly. The manipulation of FREQUENCY was assessed by asking participants the question: According to the case, how often does Beta disclose its sales information? To assess the manipulation of the knowledge that analysts viewed RAM negatively, we asked participants According to the case, how do financial analysts feel about real activities manipulation. Thirteen people failed the FREQUENCY manipulation check and 23 failed the KNOWLEDGE manipulation check. Collectively, 32 participants failed one or both manipulation check question and thus were not included in the analyses used to test the hypotheses. Seventy-three responses remained for hypotheses testing. Hypotheses Testing We conducted a two-factor ANCOVA with FREQUENCY and KNOWLEDGE as the independent variables, and the likelihood of recommending the 30% discount (RECOMMENDATION) as the dependent variable. Covariates included were demographic variables (age, gender, and professional experience). The descriptive statistics and ANCOVA results are shown in Table 1. The effects of FREQUENCY (F(1,66) = 4.14, p = (one-tail)) and KNOWLEDGE (F(1,66) = 4.48, p = (one-tail)) on RECOMMENDATION were statistically significant. Thus, H1 and H2 were supported. In addition, the interaction (F(1,66) = 2.57, p = (one-tail)) between FREQUENCY and KNOWLEDGE is marginally significant. Figure 1 describes the interaction effect. [Insert Table 1 about here] 15

16 To further examine the differences in RECOMMENDATION across conditions, we conducted a one-factor ANOVA with treatment conditions as the independent variable and RECOMMENDATION as the dependent variable. The results indicate that there were significant differences across treatments (F(3,69) = 3.56, p = 0.008, one-tail). The post-hoc analysis (Tukey HSD, untabulated) shows that the weekly-reporting/known condition was significantly different from the other three conditions, but there was no difference across the remaining three conditions. This result suggests that managers are less likely to engage in RAM only if they are informed that financial analysts view RAM negatively and sales revenue information is disclosed weekly. [Insert Figure 1 about here] IV. CONCLUSION AND DISCUSSION This research study investigates the effects of reporting frequency and the knowledge that financial analysts view RAM negatively on the likelihood of management engaging in RAM. Results of an experiment with corporate managers indicate that more frequent reporting and informing managers of the negative consequences of RAM can deter managers from engaging in RAM. Specifically, in a judgment context where corporate managers evaluate the likelihood of recommending a 30% discount to boost sales, managers reported a significantly lower likelihood of recommending the discount when they were informed that financial analysts view RAM negatively and when the firm provided more frequent disclosure. We highlight several limitations and opportunities for future research. First, we use an Internet-based experimental survey. Although the Internet-based experiment has several noted weaknesses, it also has some strengths (Bryant, Hunton, and Stone 2004). For example, Internet- 16

17 based experiments have the potential to increase validity by reducing data entry errors, demand effects, and participants evaluation apprehension while increasing respondent heterogeneity (Bryant et al. 2004). Second, given that the hypotheses are tested using an Internet-based experiment, we cannot calculate the response rate. However, Internet-based experiments have been increasingly used for behavioral accounting research (Bryant et al. 2004; Alexander, Blay, and Hurtt 2006), and psychology and accounting research has provided evidence showing that Internet-based and in-lab experiments have comparable results (e.g., Alexander et al. 2006; Krantz and Dalal 2000). Finally, this study only examines one type of RAM: sales manipulation. While sales manipulation is a commonly used method of RAM, there are several other methods. Future research could examine the effects of reporting frequency and presentation format on detecting other types of RAM. We contribute to the literature in several ways. First, we contribute to the reporting frequency literature by investigating the consequences of more frequent financial reporting. Whether more frequent financial reporting actually improves the information environment is still unclear (Fu et al. 2012). We document empirically that increased financial reporting frequency could be used to deter the use of RAM by managers. This finding may help regulators and practitioners who are interested in exploring the consequences of increased reporting frequency. Second, we contribute to earnings management literature by investigating the detection of RAM. Earnings management distorts the financial information disclosed to users and may bias users judgment and undermine investors confidence in capital markets. Prior research provides evidence suggesting that managers increasingly rely on RAM to manage earnings (Cohen et al. 2008). In addition, RAM can be more harmful to a company s financial condition than accrualbased methods and can be more difficult to detect. Therefore, it is important to understand 17

18 potential methods to deter the use of RAM by managers. Our study provides evidence showing that more frequent disclosure and educating managers of the negative consequences of RAM can be used together to reduce the use of RAM by managers. 18

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22 Table 1 Descriptive Statistics and ANOVA Results Panel A: Mean (standard deviation) {sample size} of the likelihood of recommending the 30% discount a across treatment conditions FREQUENCY Weekly Quarterly Main Effect: KNOWLEDGE Known Not Known (1.64) (1.96) {19} {19} 3.90 (1.79) {21} 3.15 (1.88) {40} 4.00 (1.88) {14} 3.88 (1.90) {33} Main Effect: 3.05 (1.93) {38} 3.94 (1.80) {35} 3.48 (1.91) {73} a Participants were asked: How likely are you to recommend that Beta provide the 30% discount? The responses were on a seven-point Likert scale where 1 represents very unlikely and 7 represents very likely Panel B: One-tailed ANCOVA Results Dependent variable: the likelihood of recommending the 30% discount Source Sum of Mean d.f. Squares Square F p-value Corrected Model Intercept FREQUENCY KNOWLEDGE FREQUENCY * KNOWLEDGE Experience Gender Age Error Total Corrected Total

23 Figure 1 The Effects of Reporting Frequency and Knowledge that financial analysts view RAM negatively on the Likelihood of RAM 23