Value Relevance of Accounting Figures in Presence of Earnings Management. Are Enforcement and Ownership Diffusion Really Enough?

Abstract

The study assesses and compares the value relevance (VR) of accounting numbers in entities that experienced high discretionary accruals intensity and so possible earnings management (EM) behaviours, testing whether and in what extent the quality of enforcement and governance mechanisms act as moderating factors on the relation EM-VR. Based on a sample of 2 667 European non-financial entities, the results show that while the VR of earnings is low in entities that experienced high discretionary accruals intensity, book value increases its VR. The study also shows that the quality of enforcement mechanisms and the ownership diffusion (that proxies the quality of corporate governance) are effectively able to obstruct the loss of VR of earnings. The value added of the paper consists in showing that both the quality of enforcement and the ownership diffusion contrast only in part and in different manner the loss of VR of earnings, due to the presence of EM behaviours, acting only in part as moderating factors.

An investigation of the value relevance of deferred tax: the mediating effect of earnings management

“…So the second hypothesis (H2) is rejected. The result indicates an insignificant relationship, which is not consistent with Shan (2015) and Callao et al (2016). However, this result supports Dewi and Wirama (2019), since the agreement with these studies due to the similarity of markets that data was collected from, which is emerging markets, either Singapore, Indonesia, or Egypt.…”

The effect of corporate governance and investor protection environments on the value relevance of new accounting standards: the case of IFRS 9 and IAS 39

“…Regarding discretion, the value relevance reduction is for the negative relationship between value relevance and earnings management (Callao et al 2016). Comparing IAS 39 with IFRS 9, the risk of earnings management behaviour is higher in the new impairment model than in the old one.…”

“…Regarding the quality of the investor protection environment, literature has provided evidence of the role of regulatory and institutional differences across countries in affecting IFRS practices (Quagli et al 2020). More specifically, investors consider accounting amounts value relevant to the extent that the quality of enforcement reduces earnings management behaviour (Callao et al 2016). Indeed, high-quality legal systems limit the managers' ability to misuse accounting discretion (Leuz et al 2003;Siekkinen 2016).…”

“…According to the literature, both corporate governance and the investor protection environment do not have a positive effect on value relevance merely for the reasons explained above. By acting as moderating factors (Callao et al 2016), they should counter the negative effect on value relevance produced by complexity and discretion. If so, for firms that rely on high-quality corporate governance or that are listed in countries with high-quality investor protection, the positive effect of such moderating factors should be able to counter the risk of involuntary mistakes or opportunistic behaviour due to the complexity of the standard and to the discretion behind the expected loss estimates.…”

Real earnings management and corporate governance: a study of Latin America

“…The competing hypothesis corresponds to a positive relationship between real activities manipulation and the shares held by the controlling owner. This approach is supported by the expropriation of minority shareholders' wealth by the majority owner (Callao, Cimini, & Jarne, 2016). It takes place when the majority shareholder has an excessively high proportion of the outstanding shares that allows him/her to expropriate the wealth of minority investors (Morck, Shleifer, & Vishny, 1988).…”