How does firm location affect the reliability of a company's financials?

How does firm location affect the reliability of a company's financials?

How does firm location affect the reliability of a company's financials?

Desmond Tsang, Associate Professor, Accounting

Professor Desmond Tsang's research explores how firm location can affect financial reporting, which may result in biased earnings figures.

Desmond Tsang

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Desmond Tsang, Associate Professor, Accounting

Desmond TsangAccording to research conducted by Professor Desmond Tsang, the quality of life and desirability of a location have a significant impact on company financial policies. While quality of life is an important factor for an employee’s choice of career location, such a motivation can affect a firm’s financial reporting. In other words, a low quality of life can lead to biased earnings figures.

Given employees’ incentives to move to better located firms, managers of firms located in regions with a low quality of life are more likely to engage in myopic activities, such as earnings management, to overstate their performance in order to improve their prospect of moving. Nonetheless, this incentive could be mitigated if the firms are more established. In that case, managers may want to “stick with it” a bit longer for the valuable work experiences at these established firms. 

“In real estate, we always talk about location, location, location. Apparently, location is also an important consideration for corporate policies. Imagine a firm located in a desirable city such as Montreal or Toronto, it would be much easier for these firms to find human talent, external financing, as well as vendors and customers. Moreover, it also helps to keep the employees more content, which translates to more truthful representation of their performances.” – Professor Desmond Tsang