Terror and shootings shake up accounting records for companies.

According to a recent study published in the British Accounting Review, terrorist attacks and mass shootings can have an impact on company accounting practices. The study found that businesses tend to become more cautious in their financial reporting following such events. Researchers analyzed over 47,000 yearly reports from more than 5,600 companies and 716 major attacks in the U.S. between 2000 and 2020. The findings showed that companies in the affected areas were less likely to engage in creative accounting practices and were more straightforward in their financial reporting.

The study suggests that the negative effects of these events can lead to pessimistic risk assessments and a decline in accrual-based and real earnings management. The researchers argue that this cautious behavior by company managers could have long-term implications for a company’s future performance and investment risk. The study also proposes that policymakers consider introducing mandatory stress tests or enhanced disclosure requirements for businesses in regions experiencing a terrorist attack to help maintain market stability and investor confidence.

One of the key factors the study examines is the role of availability heuristics, a cognitive bias that influences individuals’ decision-making processes. Emotionally impactful events like terrorist attacks and mass shootings can increase managers’ perceived probability of risk and negative future events, leading them to make more conservative financial reporting choices. The researchers suggest that companies may need to reconsider their internal policies to account for these psychological effects, resulting in more ethical business practices and improved regulations.

In conclusion, the study highlights the impact of terrorist attacks and mass shootings on company accounting practices. By analyzing a large dataset of annual reports and major attacks, the researchers found that companies in affected areas tend to be more cautious in their financial reporting, with a decline in creative accounting practices and increased transparency. The study suggests that policymakers and companies should consider implementing measures to address the psychological effects of such events and ensure market stability and investor confidence.