REAL EARNINGS MANAGEMENT EFFECT ON CUSTOMER SERVICE AND SERVICE QUALITY

I investigate the link between real earnings management and customer satisfaction. Following the passing of the Sarbanes-Oxley Act, which requires public companies to ensure the accuracy of their financial reporting, the use of non-accrual based methods to achieve financial earnings targets has become commonplace. Nonaccrual-based methods consist of decisions that curtail firm activities, which increase net income; however, these methods come at the cost of future operations. These opportunistic behaviors in the service, retail, and hospitality industries impact customers and a firm's long-term value. I hypothesize that the outcome will be lower customer satisfaction and service quality.
I use firms’ publicly available financial information to detect real earning management (REM) of selling, general, and administrative (SG&A) expenses to understand how firms operate. Physical changes to a firm’s operating environment through these financial actions are immediately observable, generating negative electronic word of mouth. I use text analysis software to determine if the comment is positive or negative and the strength of the customers' sentiment, allowing me to observe the harmful effects of reducing SG&A expenses through the lens of the customer. In addition, I use American Customer Satisfaction Index (ACSI) scores to provide an overall assessment. I regress my customer satisfaction and service quality measures on the REM measure to test the hypotheses on the impact of REM. Further, I analyze and establish the link between REM's impact on the firm's sales growth rates.