Abstract

http://ssrn.com/abstract=2185448
 
 

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The Influence of Strong Shareholders on Earnings Management


Bradley E. Lail


Baylor University

Gregory W. Martin


Indiana University - Kelley School of Business - Department of Accounting

Wayne B. Thomas


University of Oklahoma - Michael F. Price College of Business

October 23, 2013


Abstract:     
Presumably, shareholder rights aim to better align the actions of managers with the interests of shareholders; however, it is not clear from prior research whether such alignment mitigates or exacerbates managers’ propensity to manage earnings. We document that when shareholder rights are stronger, managers are more likely to manage earnings upward to meet analyst expectations or last year’s EPS. The greater propensity of firms with strong shareholder rights to manage earnings to meet earnings benchmarks is not consistent with the traditional expectation that shareholder rights serve as a governance mechanism to reduce what could be opportunistic reporting behavior. We further highlight the unique impact of shareholder rights for our sample by demonstrating that other traditional governance mechanisms (audit quality, institutional ownership, and board’s financial expertise) have the expected effect of reducing earnings management. Given recent demands to enhance shareholder rights, our study highlights an interesting and perhaps unexpected financial reporting consequence.

Number of Pages in PDF File: 43

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Date posted: December 5, 2012 ; Last revised: May 14, 2014

Suggested Citation

Lail, Bradley E. and Martin, Gregory W. and Thomas, Wayne B., The Influence of Strong Shareholders on Earnings Management (October 23, 2013). Available at SSRN: http://ssrn.com/abstract=2185448 or http://dx.doi.org/10.2139/ssrn.2185448

Contact Information

Bradley E. Lail
Baylor University ( email )
One Bear Place #98002
Waco, TX 76798
United States
Gregory W. Martin
Indiana University - Kelley School of Business - Department of Accounting ( email )
1309 E. 10th Street
Bloomington, IN 47405
United States

Wayne B. Thomas (Contact Author)
University of Oklahoma - Michael F. Price College of Business ( email )
Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)
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