Accounting Discretion, Corporate Governance and Firm Performance

65 Pages Posted: 20 Jan 2004

See all articles by Robert M. Bowen

Robert M. Bowen

Chapman University - The George L. Argyros School of Business & Economics; University of Washington - Foster School of Business

Shivaram Rajgopal

Columbia Business School

Mohan Venkatachalam

Duke University - Fuqua School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

We investigate whether accounting discretion is (i) abused by opportunistic managers who exploit lax governance structures, or (ii) used by managers in a manner consistent with efficient contracting and shareholder value-maximization. Prior research documents an association between accounting discretion and poor governance quality and concludes that such evidence is consistent with abuse of the latitude allowed by accounting rules. We argue that this interpretation may be premature because, if such association is indeed evidence of opportunism, we ought to observe subsequent poor performance, ceteris paribus.

Following Core et al. (1999) we conduct our analysis in two stages. In the first stage, we extend the prior literature and again find a link between poor governance and managers' accounting discretion. However, in the second stage we fail to detect a negative association between accounting discretion attributable to poor governance and subsequent firm performance. This suggests that, on average, managers do not abuse accounting discretion at the expense of firms' shareholders. Rather, we find some evidence that discretion due to poor governance is positively associated with future operating cash flows, which suggests that shareholders may benefit from earnings management, perhaps because it signals future performance.

Note: Previously titled "Accounting Choice, Corporate Governance and Firm Performance"

Keywords: Accounting discretion, earnings smoothing, abnormal accruals, corporate governance, managerial opportunism, signaling, firm performance.

JEL Classification: M41, G30, G34, L25

Suggested Citation

Bowen, Robert M. and Rajgopal, Shivaram and Venkatachalam, Mohan, Accounting Discretion, Corporate Governance and Firm Performance (January 2005). Available at SSRN: https://ssrn.com/abstract=367940 or http://dx.doi.org/10.2139/ssrn.367940

Robert M. Bowen

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
206.334.0911 (Phone)

HOME PAGE: http://www.chapman.edu/our-faculty/robert-bowen

University of Washington - Foster School of Business ( email )

Box 353226
University of Washington
Seattle, WA 98195-3226
United States
206.334.0911 (Phone)

HOME PAGE: http://foster.uw.edu/faculty-research/directory/robert-bowen/

Shivaram Rajgopal

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Mohan Venkatachalam (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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