“Does Physical Environment Affect Financial Reporting? Sunset Time and Misreporting” by Dr. Zhongwen Fan
Dr. Zhongwen Fan
Assistant Professor in Accounting and Law
The University of Hong Kong
Light is an important environmental factor that affects human health and psychology. This paper examines the impact of sunset time on financial misreporting, a decision shaped by human discretion. By exploiting the discontinuity in sunset time at the time-zone boundaries, we find that firms headquartered on the late-sunset side of a time-zone boundary are less likely to restate and to have SEC enforcement actions compared with those nearby firms on the other side. Next, we explore the mechanisms and find that late-sunset time reduces optimistic reporting bias and enhances managerial ethics. In addition, we find that CEOs’ work experience in multiple states counters the effect of sunset time. Finally, we provide evidence that later sunset time is associated with lower stock price crash risk. Overall, our paper provides novel evidence on the effect of physical environment on financial reporting.