Do Divisional Managers Affect Financial Reporting? Evidence from Revenue Management

Using a sample of manually collected data on divisional managers for S&P 500 firms, this study examines the effect of co-opted divisional managers on revenue manipulation. Co-opted divisional managers are those appointed after the incumbent chief executive officer assumes office. I find that a firm with a higher percentage of co-opted divisional managers has more upward revenue management when the firm just meets or beats analyst forecast. Such a finding is more pronounced when the top management has more equity ownership or when co-opted divisional managers face greater career concerns. In contrast, co-opted divisional managers are not significantly associated with revenue management when the firm’s earnings miss or are well above analyst forecast. These results are consistent with my prediction that co-opted divisional managers manipulate revenues to help top management achieve performance targets. Overall, my study suggests that divisional managers have a significant impact on financial reporting through revenue manipulation.