Aftermath of Terrorist Attacks and Mass Shootings Results in Cautionary Financial Reporting, Study Finds

Businesses in regions affected by terrorist attacks and mass shootings have been found to become more cautious in their financial reporting, according to a recent study. The study, published in the British Accounting Review, discovered that these negative events can lead to pessimistic risk assessments of financial reporting choices and a decline in accrual-based and real earnings management for companies located in the impacted areas.

Seda Oz, an assistant professor of accounting at the University of Waterloo in Canada who conducted the study, examined over 47,000 yearly reports from more than 5,600 companies and 716 major attacks in the U.S. between 2000 and 2020. The research found that companies close to where such events occurred were less likely to manipulate their financial figures and were more forthcoming in their financial reporting. It was observed that the impact was especially noticeable in companies that typically don’t share much information with the public and those with more cautious annual reports.

The study also delved into the role of availability heuristics – a cognitive bias that influences individuals’ quick decision-making. Emotionally impactful events, such as terrorist attacks and mass shootings, were found to influence managers’ financial decisions by increasing their perceived probability of risk and negative future events.

Oz stated that these reporting changes could represent a crucial factor in predicting a company’s future performance and investment risk, and 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.

Companies may need to reconsider their internal policies to account for such psychological effects, which could result in more ethical business practices and improved regulations in the future. The study suggests that managers exhibit cognitive bias that affects their financial reporting choices, thus emphasizing the need for businesses to adapt to such psychological effects.

In conclusion, this study sheds light on the impact of tragic events on businesses, highlighting the need for policymakers and businesses to take into account the psychological effects on financial decision-making. The findings offer insights into how these events can influence financial reporting and the need for businesses to consider such effects in their internal policies.