Earnings management and board oversight: an international comparison

Abstract

Purpose -This paper attempts to investigate the relationships between the board of directors' characteristics and earnings management being a proxy of earnings quality in two separate countries, France and Canada. Specifically, it aims to investigate how certain contextual features affect differently earnings management behavior, and to reveal which factors are the most prominent incentives of management discretion in both cases. Design/methodology/approach -The paper uses a performance matched discretionary accruals (PMDA) measure as a proxy for earnings management. Three separate panel-regressions are then performed on a full sample, comprising a French sub-sample and a Canadian sub-sample, to detect board characteristics and institutional features' impacts on the PMDA. Regressions are based on a panel of 180 French and Canadian listed firms' data over the period 2006-2008. Findings -Evidence shows that CEO stock ownership, independent monitoring and institutional investor's property are strong earnings management determinants in both the French and Canadian frameworks. Nevertheless, leadership structure and board size seem to be neutral. Furthermore, French firms show specific earnings management incentives which are related to high ownership concentration, low equity widespread and high contractual debt costs. Dominant minority ownership and capital market forces are the key earnings management incentives in the Canadian context. These findings are robust to alternative sensitivity tests. Research limitations/implications -Even though the findings answer some questions, earnings management incentives are still to be decided. Future research could further highlight the impact of contractual, legal, cultural, ethical and political country-specific factors related to financial reporting. Originality/value -This paper investigates how an effective board of directors is able to provide a monitoring mechanism to ensure high quality of earnings. Moreover, it builds on cross-country variations in corporate governance features and contextual-specific factors to reveal earnings management behavior's incentives in two separate environments, namely French and Canadian ones. The underlying promise is that poor corporate governance (weak board monitoring), high ownership concentration, and intensive financial market forces create incentives that largely influence manager's willingness to report earnings that don't reflect a firm's true performance.

The Effects of Corporate Ownership Structure and Board Size on Earnings Management: Evidence from Turkey

“…The study conducted by Jouber and Fakhfakh (2012) shows that some of the strong earnings factors are CEO stock ownership, independent monitoring and institutional investor's property in both the French and Canadian structures. On the other hand, Yang et al (2009) examine the external directors and institutional shareholders roles in limiting the earnings management activities on Malaysian companies.…”

Family Control and Earnings Management: An Empirical Analysis of the Lebanese Banking Sector

“…The separation of roles within the BOD will reduce agency problems and harmonize the interests of owners and management (Klein, 2002). It also supports the board's independence and limits the executive director's control of the board (Taktak and Mbarki, 2015;Jouber and Fakhfakh, 2012). Role duality is argued to be associated with high levels of earnings management (Cornett et al, 2009;Mohamad et al, 2012) because it provides greater freedom for executives to practice accounting discretion and manipulating financial reports (Saleh et al, 2005).…”

“…Since 1980s, researchers have attempted to develop models of discretionary accruals such as Healy (1985), DeAngelo (1986), and Jones model (1991) which developed in Dechow et al (1995). Accounting research then proceeded to explore the potential role of corporate governance in reducing earnings management practices (Abdul Rahman and Ali, 2006;Jouber and Fakhfakh, 2012;Mohamad et al, 2012;Xie et al, 2003).…”

“…Accounting accruals provide managers with a large extent of discretion in determining the amount and timing of expenses and income (Xie et al, 2003). Due to scandals of global companies, earnings management has become a fruitful area for several accounting studies (Abdul Rahman and Ali, 2006;Jouber and Fakhfakh, 2012;Mohamad et al, 2012).…”

Effects of corporate governance on earnings management. (c2016)

“…It mainly happens if the relationship between the agent and the principal is influenced due to some inadequacies, or if the corporate governance implementations are not availed. Many recent studies on earnings quality revealed that when managerial discretion occurs, the organization's real economic performance is lost (Jouber & Fakhfakh, 2011). In addition, many studied the factors and constraints that affect earnings management.…”