Determinants and Consequences of Management’s Reporting Materiality Discretion

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2022
Authors
Black, Jonathan
Choudhary, Preeti
Goodman, Ted
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We identify a unique setting where managers discontinue reporting values below one million in their financial statements, and use it as a reflection of managers’ discretion over what information they consider to be material. We examine both the determinants and consequences of increasing reporting materiality. Consistent with managerial opportunism, we observe that managers tend to increase materiality before decreases in operating performance, when risk-taking incentives are high, and when external monitoring is low. Furthermore, we find an increase in reporting materiality is associated decreased financial statement disclosure and increased earnings management. Consistent with opportunism generally motivating materiality increases, we find that investors on average respond negatively to the increase in reporting materiality. Our evidence suggests that managers generally use their discretion over changes in reporting materiality opportunistically, to reduce disclosure obligations.
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materiality, earnings management, disclosure, managerial discretion
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