Penny Wise and Pound Foolish: Does Striving to Meet Earnings Expectations by Manipulating Real Activities Trigger Product Recalls?

Yangyang Chen (), Lijun Ma (), Jeffrey Pittman () and Xin Yang ()
Additional contact information
Yangyang Chen: Department of Accountancy, City University of Hong Kong, Hong Kong
Lijun Ma: Business School, University of International Business and Economics, Beijing 100029, China
Jeffrey Pittman: Faculty of Business Administration, Memorial University, St. John’s, Newfoundland and Labrador A1C 5S7, Canada; and Pamplin College of Business, Virginia Tech, Blacksburg, Virginia 24060
Xin Yang: Institute of Accounting and Finance, Shanghai University of Finance and Economics, Shanghai 200433, China

Management Science, 2025, vol. 71, issue 4, 3405-3427

Abstract: We examine whether managers’ activities in striving to reach earnings targets through real earnings manipulation affect their firms’ product recalls. Our evidence implies that firms suspected of manipulating real activities in trying to meet earnings benchmarks exhibit a higher likelihood and frequency of product recalls. In cross-sectional results consistent with expectations, we find that the impact of exploiting real activities to attain earnings benchmarks on product recalls intensifies for firms whose managers have stronger incentives to manage earnings and subsides for firms subject to greater customer power and firms with more growth opportunities. Additional analysis shows that lowering product quality to meet or beat earnings expectations undermines firms’ future performance.

Keywords: product recalls; product quality; earnings expectations; real activities management (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2021.04035 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:4:p:3405-3427

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().