Terrorist Attacks Lead to More Cautious Financial Reporting for Businesses, Study Finds

TORONTO, Ontario – Following a terrorist attack or mass shooting, businesses tend to exhibit more caution in their financial reporting, a recent study has found. The study, published in the British Accounting Review, discovered that the aftermath of such events leads to more pessimistic risk assessments of financial reporting choices and a decrease in accrual-based and real earnings management for companies located in the affected areas.

Seda Oz, an assistant professor of accounting at the University of Waterloo in Canada, conducted the study. Oz examined over 47,000 yearly reports from more than 5,600 companies and 716 major attacks in the U.S. between 2000 and 2020. Data from sources such as the Global Terrorism Database and Mother Jones, along with corporate data from databases like Compustat and EDGAR, were used for the study. The research found that companies near the location of such events were less likely to manipulate their financial figures and were more straightforward in their financial reporting. This effect was especially noticeable in companies that typically don’t share much information with the public and those with more cautious annual reports.

According to the study, the impact of these reporting changes could serve as a crucial factor in predicting a company’s future performance and investment risk. Policymakers may want to consider introducing mandatory stress tests or enhanced disclosure requirements for businesses in regions experiencing a terrorist attack to help maintain market stability and investor confidence.

The paper further explores the role of availability heuristics, a cognitive bias that influences individuals’ quick but sometimes incorrect assessments, within the realm of earnings management. Emotionally impactful events, such as terrorist attacks and mass shootings, can influence managers when making financial decisions by increasing their perceived probability of risk and negative future events.

Oz believes that managers exhibit a cognitive bias that affects their financial reporting choices. The study suggests that companies may need to reconsider their internal policies to account for psychological effects, potentially resulting in more ethical business practices and improved regulations in the future.