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The Role of Corporate Governance in Reducing the Negative Effect of Earnings Management

International Journal of Economics and Finance, Vol. 5, No. 3, 2013

8 Pages Posted: 7 Aug 2013  

Nopphon Tangjitprom

Assumption University of Thailand

Date Written: February 26, 2013

Abstract

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.

Keywords: earnings management, corporate governance, accruals, discretionary accruals

JEL Classification: G34, M41

Suggested Citation

Tangjitprom, Nopphon, The Role of Corporate Governance in Reducing the Negative Effect of Earnings Management (February 26, 2013). International Journal of Economics and Finance, Vol. 5, No. 3, 2013. Available at SSRN: https://ssrn.com/abstract=2225979

Nopphon Tangjitprom (Contact Author)

Assumption University of Thailand ( email )

592/3 Ramkhamhaeng 24
Hua Mak
Bangkapi, Bangkok 10240
Thailand

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