Can Governance Mitigate Real Earnings Management?
50 Pages Posted: 26 Apr 2013
Date Written: December 25, 2011
This study investigates whether corporate governance can mitigate real earnings management. In recent years, firms have been switching from accrual based to real earnings management and the incidence of real earnings management is also increasing. The role of corporate governance to reduce accrual based earnings management is well documented in the literature, however there is no firm evidence regarding the role of corporate governance to constrain real earnings management. To fill the gap in the literature, I examine whether corporate governance can play any role to reduce real earnings management. I find evidence that firms may engage in real earnings management either to avoid reporting losses or to meet analysts’ forecasts. Cross-sectional analysis reveals that these activities are less prevalent for the firms that have larger institutional investors. However, I fail to find any evidence regarding the role of board to prevent real earnings management.
Keywords: Corporate Governance, Real Earnings Management, Board of directors, Institutional Investors
JEL Classification: G30, M41
Suggested Citation: Suggested Citation