Retail ownership and earnings management

Abstract

We exploit the October 2019 abolition of trading commissions by major U.S. brokerages as a quasi‐natural experiment examining how retail ownership affects earnings management. Firms with high pre‐event retail interest earned positive abnormal returns, consistent with an expanded investor base lowering the cost of capital. Using a differences‐in‐differences design, we find these firms subsequently increased discretionary accruals and class‐action lawsuit likelihood. Earnings surprises relative to time‐series benchmarks rise for treated firms, while surprises relative to analyst forecasts do not, suggesting analysts anticipate the increased earnings management. Effects concentrate among firms with low analyst following and no industry cash‐flow shock.