Corporate Control and Managerial Misrepresentation of Firm Performance

This paper presents two tests of the hypothesis that the managers of management-controlled firms exercise their control over the information contained in annual reports in a manner which may misrepresent firm performance. The first test finds that management-controlled firms have a significantly smaller proportion of years in which the signs of unexpected accounting earnings and unexpected security returns are the same than do owner-controlled firms. The second test finds that the timing of certain accounting policy decisions made by the managers of management-controlled firms is related to the current level of the firm's security return performance.