Geographic Location and Accounting Choices: Evidence from Managers’ Earnings Management Decisions

This study investigates the relation between firm geographic location, i.e., urban vs. rural, and managers’ earnings management choices. Adopting multiple definitions of urban and rural firms, we consistently find that compared to rural firms, urban firms are less likely to use production-related real earnings management while more likely to use accrual earnings. In addition, we find that firms’ urban location reduces the positive impact of both firm complexity and Sarbanes-Oxley (SOX) on managers’ decisions of using real earnings management. Overall, this study suggests that urban firm managers reduce the use of value-destroying real earnings management because (1) investors possess greater familiarity towards urban firms, and (2) more investors are readily accessible to urban firms’ soft information. In additional tests, we focus on a subsample of earnings management suspect firms and find that managers’ tradeoff decision of these two earnings management strategies is conditional on firms’ geographic locations