Earnings Management and Internal Control Mechanisms: Evidence from Chilean Firms

Abstract

We analyze the impact of some internal control mechanisms - ownership structure, capital structure and growth opportunities - on earnings management in Chilean firms throughout 1991-2001. Our results are interesting due to the specific characteristics of the corporate system in Chile where investor protection is weak and banks play a prominent role. We find that ownership concentration has a non-linear relation with earnings management, consistent with both the control of directors by main shareholders and the idea of expropriation of minority shareholders by large controlling shareholders. Financial leverage and public debt gives managers incentives to accounting discretion whereas bank debt plays an active role in corporate governance as a control mechanism. Our results also show that earnings are not managed to signal growth opportunities.

Keywords: Accruals, capital structure, earnings management, ownership structure

JEL Classification: G32, M41, M43