The Impact of Opportunistic Financial Reporting on the Peer Firms’ Operational Efficiency

Abstract

In this research I investigate the impact of opportunistic financial reporting on peer firms’ operational efficiency. By concealing the weakness of the rival firms’ economic performance, opportunistic financial reporting causes peer firms to be misled in interpreting signs related to the future economic conditions. This situation results in incorrect evaluation of investment opportunities, and thereby, lead to non-optimal capital expenditure decisions. The results, based on the data of 212 firms listed in Tehran Stock Exchange during the years 1388-1400 (1,666 firm-year observations), show that peers’ operational efficiency declines after rival firms misstate their financial performance. However, not all peer firms are homogenously affected by the negative impact of opportunistic reporting. Peer firms with poor past performance suffer less from the negative effects of opportunistic reporting. Rival firms’ opportunistic reporting can motivate the firms with poor performance to a more optimal level of capital expenditures, and thus, increasing the operational efficiency. In addition, the results show that the effect of opportunistic reporting is weaker when the peer firm is an industry leader, because, they are less likely to mimic the policy of less successful firms.

Keywords

• peer firms
• operational efficiency
• opportunistic financial reporting