The Role of Corporate Governance in Reducing the Negative Effect of Earnings Management
Assumption University of Thailand
February 26, 2013
International Journal of Economics and Finance, Vol. 5, No. 3, 2013
This paper aims to examine the role of corporate governance in reducing the negative effect of earnings management. The accounting data for U.S. firms during 2002-2010 were collected from WorldScope database and the corporate governance data were from ASSET4, which is an affiliate of Thomson Reuter. Earnings management can be harmful to firm value if it arises from managerial opportunism, whereas it can also be beneficial if managers intend to convey some information about future earnings or reduce the volatility of reported earnings. The empirical evidence has shown that earnings management has a negative effect on firm value. However, the negative effect of earnings management is neutralized by the role of corporate governance, which helps to reduce managerial opportunism. Firms with a lower CG score face the negative effect of earnings management, whereas firms with a higher CG score face a less-negative effect from earnings management. In other words, managerial opportunism with earnings management is lower in good-governance firms. Therefore, corporate governance provides a crucial role in reducing the negative effect of earnings management.
Number of Pages in PDF File: 8
Keywords: earnings management, corporate governance, accruals, discretionary accruals
JEL Classification: G34, M41
Date posted: August 7, 2013
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