Earning Management and Corporate Governance Around UK Rights Issues
International Journal of Managerial Finance, Vol. 6(3), pp.168-189, 2010
Posted: 29 Nov 2014
Date Written: August 20, 2010
This study investigates the relation between corporate governance and earnings management around UK rights issues. We examine the effect of board structure, ownership structure, adviser structure, and capital structure on discretionary current accruals — a proxy for earnings management — for a sample of size-controlled rights issuers. We choose rights issues as a context in which firms have particular incentives to manage earnings. Our results suggest that firms with higher debt to equity ratios, with lower proportions of non-executive directors, or with no large block owner, are more likely to use discretionary current accruals to manipulate earnings around rights issues. Similar research can be conducted around other equity issuing methods such as open offers and around other major corporate events such as initial public offerings. Our evidence contributes to an understanding of corporate governance and has practical implications for stakeholders. It suggests that investors can rely more on the financial disclosures of firms with lower debt to equity ratios, higher proportions of outside directors, and with a large blockholder. Regulators may propose that firms undertaking corporate events such as equity offerings should follow best corporate governance practices to enhance investor confidence. This study is the first to investigate the corporate governance mechanisms in place to check opportunistic earnings management around specific corporate events for the UK market.
Keywords: Corporate Governance, Earnings Management, Rights Issues, Seasoned Equity Offerings, Accruals
JEL Classification: G32
Suggested Citation: Suggested Citation