Predicting Accounting Misconduct: The Role of Firm-Level Investor Optimism

  • Shantaram Hegde
  • Tingyu ZhouEmail author
Original Paper


Motivated by a large literature on how firm-specific resources (such as leadership and management skills, strategies, organizational capabilities and intellectual properties) drive firm performance, we propose and find that heterogeneity in investor optimism regarding firm-specific attributes plays a very important role in influencing the managerial propensity to manipulate financial statements. When firm-level investor optimism is moderate, the incidence of accounting misconduct increases, but it decreases when investors are highly optimistic. Further, market reaction to the announcement of financial restatements is more negative when investors held more optimistic firm-specific beliefs at the time of initial misstatement. These findings are robust to alternative firm-specific optimism measures linked to analysts, general investors and unsophisticated individual investors, controls for market-wide consumer sentiment unexplained by macroeconomic factors, economy-wide and industry-level optimism, potential selection bias and reverse causality. Our analysis highlights the importance of firm-level investor optimism in predicting, preventing and detecting accounting misconduct.


Investor optimism Financial reporting Accounting misconduct Irregularity Earnings management Market reactions 

JEL Classification

G10 G14 G34 G38 



We are very grateful to Steven Dellaportas (the editor) and two anonymous referees for their very helpful comments. We thank Jonathan M. Karpoff, Allison Koester, D. Scott Lee and Gerald S. Martin who generously shared with us the Federal Securities Regulation (FSR) database. We thank Andrew J. Leone for generously sharing the General Accountability Office (GAO) data on classification of errors and irregularities. We appreciate insightful comments from Assaf Eisdorfer, Efdal Misirli, John Clapp, Joseph Golec, John Glascock and seminar participants at University of Connecticut, the 2016 Annual Meeting of Southern Finance Association (SFA) and the 4th India Finance Conference.

Compliance with Ethical Standards

Conflict of interest

The authors declare that they have no conflict of interest.

Supplementary material

10551_2018_3848_MOESM1_ESM.pdf (372 kb)
Supplementary material 1 (PDF 373 kb)


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Copyright information

© Springer Science+Business Media B.V., part of Springer Nature 2018

Authors and Affiliations

  1. 1.Finance Department, School of BusinessUniversity of ConnecticutStorrsUSA
  2. 2.Department of Risk Management/Insurance, Real Estate and Legal StudiesFlorida State UniversityTallahasseeUSA

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