Professor Aloke (Al) Ghosh spoke at the HEC Business School, Switzerland in 2010. During this presentation, Professor Ghosh discusses managerial exposure to losses.
INTRODUCTION: In a recent study, Roychowdhury (2006) provides persuasive evidence consistent with the premise that managers manipulate operating (‘real’) activities to avoid reporting losses. By deviating from normal operations, managers avoid reporting losses through cash flow from operations. Similarly, the discontinuity in the frequency of firm-years around zero earnings (e.g., Hayn 1995, Burgstahler and Dichev 1997) is widely cited as evidence of earnings management to avoid reporting losses.1 In a related survey, Graham et al. (2005) conclude that executives prefer not to report losses by manipulating earnings even when such activities might erode firm value. But why are Chief Executive Officers (CEOs) so keen to avoid reporting losses?by