Purpose: This study aims to investigate whether shareholders are convinced by earnings management. This study also explores how board gender diversity (the presence of female directors on the board) may influence the extent to which shareholders are convinced by earnings management. Design/methodology/approach: The authors estimate the stock market reactions to the September 11 terrorist attack using the standard event study methodology. The authors then run a cross-sectional analysis to investigate whether the market reactions are influenced by the extent of earnings management. Furthermore, the authors test how board gender diversity affects the degree to which earnings management influences the stock market reactions. Findings: The study results show that the market reactions to the attack are substantially mitigated for firms that exercise more upward discretionary accruals, implying that earnings management is successful in convincing shareholders. Additional analysis corroborates the results, including propensity score matching, instrumental variable analysis and using Oster’s (2019) method for testing coefficient stability. Crucially, the authors find that board gender diversity helps shareholders see through earnings management better. The presence of female directors significantly weakens the extent to which shareholders are persuaded by earnings management. Originality/value: This study is the first to explore the effect of earnings management on shareholder wealth using the September 11 terrorist attack. The research design is less vulnerable to endogeneity and is thus much more likely to show a causal effect of accounting accruals on shareholder wealth.
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