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Mr. Yibin Liu
Ph.D. Candidate in Economics
University of California San Diego

ABSTRACT

I study the causal effect of the implementation of the EDGAR system on financial reporting. Ten groups of public firms were mandated by the U.S. SEC to transition from paper to electronic filings on the EDGAR system from 1993 to 1996, which provides exogenous variations in investors’ information acquisition cost. Firms with electronic filings on EDGAR receive higher public scrutiny, which deters managers from biasing earnings. On the other hand, I document a significant increase in the earnings response coefficient for firms on EDGAR, which boosts up managers’ marginal benefit of biasing earnings. The two countervailing effects of higher public scrutiny facilitated by the EDGAR system result in an insignificant change in total earnings management after firms were phased-into EDGAR. However, firms substitute away from opportunistic discretionary accruals to real activity based earnings manipulations, which is an important unintended consequence of the EDGAR system. Lastly, firms with low (high) ex-ante public scrutiny increase (does not change) overall earnings management, consistent with the prediction of an inverse-U relation between ex-ante public scrutiny and reporting bias by Samuels, Talyor, and Verrecchia (2020). My results shed light on a crucial trade-off faced by securities regulators worldwide in informing corporate outsiders and incentivizing corporate insiders to make socially optimal operational and financial reporting decisions.