Testing for impression management in creative accounting: A case of the automobile industry
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In a world of corporate scandals and economic difficulties, the need for transparency is becoming ever more apparent. Managers are becoming increasingly cognizant of the demand from stakeholders and feel pressured into creating the impression that they are operating on a profitable basis. Examples of this attitude have appeared to be evident in the automobile industry. Following the decrease in automobile sales throughout 2008, General Motors (GM), Chrysler and Ford asked the United States (U.S.) government for a $50 billion bailout to avoid bankruptcy (U.S. Treasury, 2009). During the following year, both GM and Chrysler filed for bankruptcy and had to be bailed out by the U.S. government (The Economist, 2009). Leading up to the financial crisis, GM sales started to decline, partly because of rising fuel costs, and access to the funds needed to finance its operations also dried up. GM was not alone; the entire automotive industry crisis of 2008–2010 was a part of the global financial meltdown that saw sales plummet (The Economist, 2009). As sales decreased, the automobile companies in Asia, Europe, and North America started to use creative reporting techniques to entice shareholders to invest in their companies (Bai, 2012; Bolt and Powell, 2016). The presentation of an image of increased profitability, when in fact performance is declining, is known as impression management (Brennan and Merkl-Davies, 2013). The idea that impression management could be an indicator that a company is in financial distress has motivated this research. The origin of impression management is rooted in sociologist Erving Goffman's (1959) work on dramaturgical theory. The theory of impression management suggests that individuals attempt to influence the perceptions of others, by regulating and controlling social interaction (Goffman, 1959; Leary and Kowalski, 1990; Merkl-Davies and Brennan, 2011a; Schlenker 1980; Tedeschi, 1981). According to Pontari and Schlenker (2006), the manipulation of impressions can involve the individual creating a “mix of truth, exaggeration and even lies” in order to achieve the desired goal (p. 117). It is not uncommon for individuals to be conscious of the impact they have on others. As a result of this perception, individuals will gauge what impressions they believe others to have of them to ensure their reputation is not damaged (Leary and Kowalski, 1990; Merkl-Davies and Brennan, 2011a). Goffman (1959), in coining the term impression management, associated it with a stage performance whereby the individual, referred to as the actor, will perform differently depending on the setting (also see Tedeschi, 1981). This performance is also known as the dramaturgical approach (Goffman, 1959; Schlenker, 1980). The performance is described by Goffman (1959) as “the activity of a given participant on a given occasion which serves to influence in any way any of the other participants” (p. 26). To further develop the dramaturgical idea of life as a stage, Goffman (1959) suggests that social situations have front and back regions, otherwise known as the setting. The front region is “the place where the performance is given” (Goffman, 1959, p.110) and is used to give the appearance that certain standards and qualities are being upheld. Whilst present in the front region, actions that support the desired impression are accentuated but, at the same time, actions that do not contribute to the desired impression are suppressed. It is within the back region that these suppressed actions become apparent (Goffman, 1959). As a result of this behavior, the back region can be defined as “a place … where the impression fostered by the performance is knowingly contradicted” (p. 114). In a dramaturgical sense, the back region is the place where the actor can step out of character and be his or her true self. Of late, impression management has transcended sociological boundaries and has become a widely used theoretical framework in general business and accounting studies (Bhattacharya et al., 2007; Bowen, Davis, and Matsumoto, 2005; Clatworthy and Jones, 2003; Guillamon-Saorin and García Osma, 2010; Merkl-Davies and Brennan, 2011b; Short and Palmer, 2003). In the business and accounting literature, impression management is conceptualized as, “managers us[ing] judgment in financial reporting…to alter financial reports to…mislead some stakeholders about the underlying economic performance of the company” (Healy and Wahlen, 1999, p. 368). Research in this area has recognized the existence of economic incentives for managers to display self-interested behavior in financial reporting (Goundar & Moriarity, 2009). More specifically, findings from the financial reporting literature indicate that some managers make disproportionate choices in disclosure and presentation in annual reports (Beattie and Jones, 2000; Lougee and Marquardt, 2004; Murphy and Zimmerman, 1993). This paper seeks to determine whether managers in the auto industry were selective in the presentation of annual reports, by misreporting (committing fraud) financial results in a self-interested and self-serving manner. In doing so, the paper seeks to answer the following question: Does impression management exist within the automotive industry? Impression management is operationalized as (i) selectivity and (ii) strategic benchmarks. A fixed-effect regression model and a random-effect regression model are run. A Hausman test is used in order to choose between the two models.
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