Ethics, Diversity Management and Financial Reporting Quality
20 Pages Posted: 11 Sep 2009 Last revised: 13 Apr 2010
Date Written: September 10, 2009
Abstract
This article proposes and empirically tests a theoretical framework incorporating Reidenback and Robin’s (1991) conceptual model of corporate moral development. The framework is used to examine the relation of governance and business ethics, as proxied by diversity management, with financial reporting quality, as proxied by the magnitude of earnings management. The level of diversity management (DM) and governance quality are measured in accordance with the ratings of Jantzi Research (JR), a leading provider of social and governance research for institutional investors. This DM score is part of an index developed by JR that investment managers use to integrate DM criteria into their investment decisions. As expected, a negative relation between corporate DM development and FRQ is found while controlling for other factors known in the governance and accounting choices literatures to affect earnings quality. Despite some caveats presented in conclusion, this study contributes to the ethics, governance and financial reporting literatures by studying the dynamics between governance and ethics in the prevention of earnings management.
Keywords: ethics, diversity, diversity management, governance, financial reporting quality, earnings management, earnings quality
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