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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Yangyang Chen & Lijun Ma & Jeffrey Pittman & Xin Yang, 2025. "Penny Wise and Pound Foolish: Does Striving to Meet Earnings Expectations by Manipulating Real Activities Trigger Product Recalls?," Management Science, INFORMS, vol. 71(4), pages 3405-3427, April.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:4:p:3405-3427
    DOI: 10.1287/mnsc.2021.04035
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