55527481
THE ASSOCIATION BETWEEN CORPORATE GOVERNANCE AND EARNINGS MANAGEMENT: THE ROLE OF INDEPENDENT DIRECTORS
The agency perspective of corporate governance emphasises the monitoring role of the board of directors. This study is concerned with analysing whether independent directors on the board and audit committee (recommendations of the ASX Corporate Governance Council, 2003) are associated with reduced levels of earnings management. The results support the hypotheses that a higher proportion of independent directors on the board and on the audit committee are associated with reduced levels of earnings management. The results are robust to alternative specifications of the model. This study adds to the very limited research into the relationship between corporate governance and earnings management in Australia. It also provides empirical evidence on the effectiveness of some of the regulators’ recommendations, which may be of value to regulators in preparing and amending corporate
198600562
Earnings Management and Corporate Governance: The Roles of the Board and the Audit Committee
We examine the role of the board of directors, the audit committee, and the executive committee in preventing earnings management. Supporting an SEC Panel Report's conclusion that audit committee members need financial sophistication, we show that the composition of a board in general and of an audit committee more specifically, is related to the likelihood that a firm will engage in earnings management. Board and audit committee members with corporate or financial backgrounds are associated with firms that have smaller discretionary current accruals. Board and audit committee meeting frequency is also associated with reduced levels of discretionary current accruals. We conclude that board and audit committee activity and their members' financial sophistication may be important factors in constraining the propensity of managers to engage in earnings management.
154458569
Institutional monitoring and opportunistic earnings management
Abstract Investment institutions with substantial shareholdings in a firm have the resources and incentives to monitor and influence management decisions. Whether the institutions actually monitor and exert pressure on managers is an empirical question. Previous studies have reported mixed results on this question. We examine whether large institutional shareholdings in a firm deter earnings management by its managers when those executives otherwise have incentives to increase or decrease reported profits. Using discretionary accounting accruals as the measure of earnings management, we find that the presence of large institutional shareholdings inhibit managers from increasing or decreasing reported profits towards the managers' desired level or range of profits. The evidence is consistent with institutional investors monitoring and constraining the self-serving behavior of corporate managers.
154840386
Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?
This paper examines whether the incidence of earnings management by UK firms depends on board monitoring. We focus on two aspects of board monitoring: the role of outside board members and the audit committee. Results indicate that the likelihood of managers making income-increasing abnormal accruals to avoid reporting losses and earnings reductions is negatively related to the proportion of outsiders on the board. We also find that the chance of abnormal accruals being large enough to turn a loss into a profit or to ensure that profit does not decline is significantly lower for firms with a high proportion of outside board members. In contrast, we find little evidence that outside directors influence income-decreasing abnormal accruals when pre-managed earnings are high. We find no evidence that the presence of an audit committee directly affects the extent of income-increasing manipulations to meet or exceed these thresholds. Neither do audit committees appear to have a direct effect on the degree of downward manipulation, when pre-managed earnings exceed thresholds by a large margin. Our findings suggest that boards contribute towards the integrity of financial statements, as predicted by agency theory.
54538527
A Survey of Corporate Governance
This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor
195089
Separation of Ownership and Control
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of ownership and control. Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.
17062014
Financial Accounting and Corporate Governance: A Discussion
Disclosed are a sulfonyl group containing fluorocarbon polymer cation-exchange membrane which has been fabric reinforced and, on one side of which has been treated, after the fabric reinforcing has been applied in a heat-pressure application, to a depth of at least 10 microns with a primary amine or a secondary amine or mixtures thereof to aminate a majority of said sulfonyl groups.
53698129
Financial Accounting Information and Corporate Governance
This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first review and analyze research on the use of financial accounting measures in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and suggest opportunities for expanding such research in the U.S. and abroad, including the consideration of interactions among control mechanisms. We also propose research to investigate more directly the effects of financial accounting information on economic performance through its role in governance and more generally using a cross-country approach.
153954770
The Takeover Market, Corporate Board Composition, and Ownership Structure: The Case of Banking
HE incentive conflict arising from the separation of the management and ownership of corporate resources has been extensively researched.' Recently, interest has focused on the interaction between external devices that control managerial behavior (for example, the market for takeovers) and internal mechanisms for control (for example, boards of directors). In particular, Eugene F. Fama, Eugene F. Fama and Michael C. Jensen, and Oliver E. Williamson have hypothesized that the composition of the board of directors will reflect the hazards facing residual claimants.2 The hazard of managerial departure from value maximization, they contend, will depend on the nature of the production process, the internal
154983300
Outside directors and CEO turnover
Abstract This paper examines the relation between the monitoring of CEOs by inside and outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the probability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result does not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management.
152740972
Do outside directors monitor managers
Abstract Examining 128 tender offer bids made from 1980 through 1987, we categorize outside directors as either independent of or having some affiliation with managers, and find that bidding firms on which independent outside directors hold at least 50% of the seats have significantly higher announcement-date abnormal returns than other bidders. However, the relationship between bidding firms' abnormal stock returns and the proportion of board seats held by independent outside directors is nonlinear, suggesting it is possible to have too many independent outside directors. All results are lost if the traditional inside-outside board classification method is used.
54505654
The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems
Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increasing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy. Copyright 1993 by American Finance Association.
150924665
Positive Accounting Theory: A Ten Year Perspective
This paper reviews and critiques the positive accounting literature following the publication of Watts and Zimmerman (1978, 1979), The 1978 paper helped generate the positive accounting literature that offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in that debate. It also suggests ways to improve positive research in accounting choice. The most important of these improvements is tighter links between the theory and the empirical tests. A second suggested improvement is the development of models that recognize the endogeneity among the variables in the regressions. A third improvement is reduction in measurement errors in both the dependent and independent variables in the regressions.
113400953
Earnings Management to Exceed Thresholds
Investors are keenly interested in financial reports of earnings because earnings provide important information for investment decisions. Thus, executives who are monitored by investors and directors face strong incentives to manage earnings. We introduce consideration of behavioural/institutional thresholds for earnings in this mix of incentives and governance. A model illustrates how thresholds induce specific types of earnings management. Empirical explorations find clear support for earnings management to exceed each of the three thresholds that we consider: positive profits, sustain-recent-performance, and meet-market-expectations. The thresholds are hierarchically ranked. The future performance of firms that possibly boost earnings to just cross a threshold appears to be poorer than that of less suspect control groups.
154221481
Earnings Management During Import Relief Investigations
This study tests whether firms that would benefit from import relief (e.g., tariff increases and quota reductions) attempt to decrease earnings through earnings management during import relief investigations by the United States International Trade Commission (ITC). The import relief determination made by the ITC is based on several factors that are specified in the federal trade acts, including the profitability of the industry. Explicit use of accounting numbers in import relief regulation provides incentives for managers to manage earnings in order to increase the likelihood of obtaining import relief and/or increase the amount of relief granted. While studies of earnings management typically examine situations in which all contracting parties have incentives to "perfectly" monitor (adjust) accounting numbers for such manipulation, import relief investigations provide a specific motive for earnings management that is not
53339976
DETECTING EARNINGS MANAGEMENT
This paper evaluates alternative models for detecting earnings management. The paper restricts itself to models that assume the construct being managed is discretionary accruals, since such models are commonly used in the extant accounting literature. Existing models range from simple models in which discretionary accruals are measured as total accruals, to more sophisticated models that separate total accruals into a discretionary and a non-discretionary component. Prior to this paper, there had been no systematic evidence bearing on the relative performance of these alternative models at detecting earnings management. This paper evaluates the relative performance of the competing models by comparing the specification and power of commonly used test statistics across the measures of discretionary accruals generated by each model. The specification of the test statistics is evaluated by examining the frequency with which they generate type I errors for a random sample of firm-years and for samples of firm-years with extreme financial performance. We focus on samples with extreme financial performance because the stimuli investigated in previous research are frequently correlated with financial performance. The first sample of firms are targeted by the Securities and Exchange Commission for allegedly overstating annual earnings and the second sample is created by artificially introducing earnings management into a random sample of firms.
152857274
Earnings and Impression Management in Financial Reports: The Case of CEO Changes
This article examines earnings management, as well as the presentational format of graphs (impression management) in the financial reports of sixty-three Australian listed public companies that changed chief executive officers (CEOs). Prior U.S. evidence generally suggests downward earnings management in the year of senior management changes and upward earnings management in the following year (Pourciau, 1993). We argue that new managers not only have incentives to manage earnings but also have similar incentives to manipulate the impressions created by graphs in financial reports. Examining earnings and impression management at the same time also provides an opportunity to distinguish between alternative explanations for any observed earnings management. In the year of CEO change, we hypothesize and find evidence of downward earnings management and some limited evidence of unfavourable impression management of the key financial variables (KFVs) graphed. As posited, we find evidence of upward earnings management and some evidence of favourable impression management in the year after a CEO change. These results are strongest for the subsample in which the CEO change was prompted by a resignation rather than a retirement.
153439371
Directors’ Recommendations on Takeover Bids and the Management of Earnings: Evidence from Australian Takeovers
This article investigates whether Australian companies manage their earnings during takeover bids in a manner consistent with the earnings-management hypothesis. This hypothesis predicts that directors who reject a bid use accrual accounting to increase current earnings, supporting their claim that the bid, relative to earnings, is inadequate. Likewise, directors who accept a bid are predicted to use accrual accounting to decrease current earnings. Overall, the results are not consistent with the earnings-management hypothesis. However, some components of unexpected accruals (our proxy for managed earnings) change in the direction predicted by the earnings-management hypothesis, although these changes are not statistically significant. Using industry adjusted performance measures the conclusion is that unexpected accruals are primarily a manifestation of poor financial performance of target firms in the period leading up to the takeover bid.
60574381
Introduction to business statistics: A computer integrated approach
A mainstream text appropriate for both the undergraduate and MBA levels, for either the one- or two-term introductory business statistics course. Comprehensive coverage with a conversational writing style to make the text less intimidating to the student. Fully integrates the use of computers with statistics, yet can still be used by those desiring a more traditional calculator-based approach. This edition stresses data analysis, asking students to interpret statistical results and make decisions based on them.