The Influence of Strong Shareholders on Earnings Management

43 Pages Posted: 5 Dec 2012 Last revised: 14 May 2014

Bradley E. Lail

Baylor University

Gregory W. Martin

University of North Carolina (UNC) at Charlotte - Department of Accounting

Wayne B. Thomas

University of Oklahoma - Michael F. Price College of Business

Date Written: 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.

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: https://ssrn.com/abstract=2185448 or http://dx.doi.org/10.2139/ssrn.2185448

Bradley E. Lail

Baylor University ( email )

One Bear Place #98002
Waco, TX 76798
United States

Gregory W. Martin

University of North Carolina (UNC) at Charlotte - Department of Accounting ( email )

9201 University City Blvd
Charlotte, NC 28223
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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