Boards, Takeover Protection, and Real Earnings Management

47 Pages Posted: 12 Jun 2013 Last revised: 12 Oct 2014

See all articles by Wenxia Ge

Wenxia Ge

University of Ottawa

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Date Written: June 11, 2013

Abstract

We investigate the effect of board governance and takeover protection on real earnings management. Four types of real earnings management are considered: sales manipulation, overproduction, the abnormal reduction of research and development (R&D) expenses, and the abnormal reduction of other discretionary expenditures. Using panel data from U.S. public firms in the post-Sarbanes–Oxley Act period, we find that the level of real earnings management (sales manipulation, abnormal declines in R&D expenses, and other discretionary expenses) increases with better board governance and decreases with higher takeover protection. These two governance factors generally have no significant effect on overproduction. We further find that firms substitute accrual-based earnings management with sales manipulation and abnormal cuts in discretionary expenses, and the substitution effect is more pronounced in firms with stronger board governance. Overall, our findings indicate that the level of real earnings management is higher when a firm is faced with tough board monitoring, and that takeover protection may reduce managerial incentives for real earnings management.

Keywords: Corporate governance, Board, Anti-takeover provision, Real earnings management

JEL Classification: M41, G34

Suggested Citation

Ge, Wenxia and Kim, Jeong-Bon, Boards, Takeover Protection, and Real Earnings Management (June 11, 2013). Review of Quantitative Finance and Accounting, 2014, 43 (4): 651-682, Available at SSRN: https://ssrn.com/abstract=2277998

Wenxia Ge (Contact Author)

University of Ottawa ( email )

55 Laurier Avenue East
Ottawa, Ontario K1N 6N5
Canada

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
255
Abstract Views
2,106
Rank
226,822
PlumX Metrics