An article by ICEF Assistant Professor Sofya Budanova on the manipulation of financial reports will be published in Management Science

Corporate financial statements can be quite subjective documents, because accounting rules are flexible and accountants often may use their discretion on how to report certain transactions. An article by ICEF Assistant Professor Sofya Budanova deals with this phenomenon.

The article is called The Ambiguity of Earnings Announcements and it is co-written with Davide Cianciaruso (HEC Paris) and Ivan Marinovic (Stanford GSB). In 2020, the paper will be published in the print edition of international peer-reviewed journal Management Science.

Management Science, established in 1954, covers research on all aspects of management related to strategy, entrepreneurship, innovation, information technology, and all functional areas of business, including finance. Management Science is featured in the list of 50 journals used in the Financial Times Research Rank.

The article studies a firm’s investment and manipulation decisions, and how these interact with the stock market’s pricing of the firm. In particular, stock market participants face uncertainty about at least two characteristics of the firm: the return on investment and the reliability of the firm’s reporting system. The study analyzes how these two sources of uncertainty can distort investment choices. Further, it shows that disclosure policies aimed at reducing informational asymmetries regarding these sources of uncertainty can, in fact, be detrimental to social welfare under some conditions.