Related party transactions, corporate governance and earnings management

2018 ◽  
Vol 18 (6) ◽  
pp. 1124-1146 ◽  
Author(s):  
Pier Luigi Marchini ◽  
Tatiana Mazza ◽  
Alice Medioli
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Least Squares ◽  
Positive Association ◽  
Ordinary Least Squares ◽  
Content Type ◽  
Related Party Transactions ◽  
Governance Indicator ◽  
Contingency Perspective ◽  
Good Corporate Governance

Purpose Following the contingency perspective, this paper aims to examine if a good corporate governance structure is able to reduce earnings management made through related party transactions. The authors expect that a high-quality corporate governance influences private benefit acquisition and reduces the positive association between related party transactions and earnings management. Design/methodology/approach A two-stage least squares instrumental variable approach is used to further address endogeneity concerns in this study. The model is organized into three parts: the construction of the corporate governance indicator, the first stage regression to compute the predicted corporate governance indicator and the second stage regression (ordinary least squares multivariate regressions) to analyze the relationship between related party transactions and earnings management. The analysis focuses on a sample of Italian listed companies over the period 2007-2012. Findings The study finds that the interaction between sales-related party transactions and corporate governance is negatively associated with abnormal accruals, signaling that corporate governance quality reduces the positive association between sales-related party transactions and earnings management, consistently with the contingency perspective. Originality/value The research contributes to literature by empirically testing the assumption of contingency perspective. In particular, the results provide new insights to the academic community, underlying that good corporate governance mechanism helps to reduce earnings management behavior through related party transactions.

Voting with hands, earnings management and corporate governance

2019 ◽  
Vol 18 (2) ◽  
pp. 178-197
Author(s):  
Ting Li ◽  
Xinlei Zhao ◽  
Aiwu Zhao
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Internal Control ◽  
Univariate Analysis ◽  
Negative Relationship ◽  
Ordinary Least Squares ◽  
External Control ◽  
Substitution Effects ◽  
Content Type ◽  
Shareholder Proposals

Purpose Motivated by managers’ intentions to pursue private interests by engaging in earnings management, this paper aims to investigate whether voting with hands (shareholders cast votes on shareholder proposals) by shareholders acts as an external disciplining mechanism over earnings management relative to corporate governance. Also, as corporate governance can scrutinize managers’ behavior, this study also examines whether there is a substitutive relation between shareholder proposals and corporate governance mechanism. Design/methodology/approach First, this paper uses ordinary least squares (OLS) regressions of discrepancy accruals on the percentage of “For” votes for shareholder proposals to test the incremental effect of shareholder proposals on earnings management. Second, firms receiving shareholder proposals are matched with those not receiving proposals by propensity scores, and the levels of earnings management and corporate governance between these two groups are compared by univariate analysis and OLS regressions. In addition, six portfolios are created based on whether firms receive shareholder proposals, as well as on the levels of corporate governance, to assess whether external control from shareholder proposals can substitute internal control for corporate governance in disciplining earnings management. Regressions of earnings management on corporate governance (shareholder proposals) are conducted in the sub-samples formed on shareholder proposals (corporate governance) to further explore the above substitution effects. Findings Based on a sample of 2,041 firm-year observations from 2001 to 2010, this paper finds that the “For” votes received from the shareholder proposals have a significant negative relationship with the practice of earnings management, even when corporate governance is controlled. The negative relationship between shareholder proposal and magnitude of earnings management is also found to be stronger when firms have weak corporate governance. The overall evidence suggests that the external control from “voting-with-hand” shareholders has a significant impact on earnings management. In addition, shareholder proposals can substitute the monitoring mechanism for corporate governance in constraining managers’ myopic behavior. Originality/value This paper contributes to the extant literature by using the percentage of “For” votes for shareholder proposals as a proxy for shareholder pressure and concerns. This study contributes to the earnings management literature by showing the disciplinary effect of outside shareholders on managers’ reporting behavior. Also, it contributes to the corporate governance research by presenting that shareholder proposals can substitute for the internal control of corporate governance in decreasing earnings management. This paper should be of interest to investors and standard setters.

scholarly journals Voluntary appointment of independent directors: evidence from Taiwan

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mao-Feng Kao ◽  
Lynn Hodgkinson ◽  
Aziz Jaafar
Keyword(s):  
Corporate Governance ◽  
Least Squares ◽  
Research Work ◽  
Ordinary Least Squares ◽  
Independent Directors ◽  
Parameter Estimates ◽  
Two Stage ◽  
Data Set ◽  
Content Type ◽  
Two Stage Least Squares

Purpose Using a data set of Taiwanese listed firms from 2002 to 2015, this paper aims to examine the determinants to voluntarily appoint independent directors. Design/methodology/approach This study uses panel estimation to exploit both the cross-section and time-series nature of the data. Further, this paper uses Tobit regression, generalized linear model (GLM) in the additional analysis and the two-stage least squares to mitigate for a possible endogeneity issue. Findings The main findings show that Taiwanese firms with large board sizes tend to voluntarily appoint independent directors and firms that already have independent supervisors more willingly to accept additional independent directors onto the board. Furthermore, ownership concentration and institutional ownership are positively associated with the voluntary appointment of independent directors. On the contrary, firms controlled by family members are generally reluctant to voluntarily appoint independent directors. Research limitations/implications The findings are important for managers, shareholders, creditors and policymakers. In particular, when considering the determinants of the voluntary appointment of independent directors, the results indicate that independent supervisors, outside shareholders and institutional investors are significant factors in influencing effective internal and external corporate governance mechanisms. This research work focuses on the voluntary appointment of independent directors. It would be interesting to compare the effectiveness of voluntary appointments with a mandatory appointment within Taiwan and with other jurisdictions. Originality/value This study incrementally contributes to the corporate governance literature in several ways. First, this study extends the earlier research by using a more comprehensive data set of non-financial Taiwanese firms and using alternative methodologies to investigate the determinants of voluntary appointment of independent directors. Second, prior studies tend to neglect the possible issue of using a censored and fractional dependent variable, the proportion of independent directors, which might yield biased and inconsistent parameter estimates when using ordinary least squares regression estimation. Finally, this study addresses the relevant econometric issues by using the Tobit, GLM and the two-stage least squares for a possible endogeneity concern.

Tax avoidance and stock price crash risk: mitigating role of managerial ability

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mukesh Garg ◽  
Mehdi Khedmati ◽  
Fanjie Meng ◽  
Prabanga Thoradeniya
Keyword(s):  
Least Squares ◽  
Stock Price ◽  
Tax Avoidance ◽  
Positive Association ◽  
Ordinary Least Squares ◽  
Dark Side ◽  
Crash Risk ◽  
Managerial Ability ◽  
Content Type ◽  
Practical Implications

PurposeThe purpose of this paper is to examine whether the quality of management can mitigate the positive association between corporate tax avoidance and firm-specific stock price crash risk (SPCR).Design/methodology/approachThe study is based on data from the Center for Research in Security Prices (CRSP), Compustat and ExecuComp and focuses on US-listed firms from 1980 to 2016. The authors employ ordinary least squares (OLS) regression as the baseline methodology and use five measures of tax avoidance and three measures of SPCR. Propensity score matching (PSM) and two-stage least squares methodologies are employed to address endogeneity concerns.FindingsThe authors find that more able managers weaken the positive relationship between tax avoidance and SPCR. The results suggest that the benefits of efficient tax management are more likely in firms with a more able management team as the likelihood of SPCR due to tax avoidance practices is reduced in such firms.Practical implicationsThis study has important practical implications for investors who are concerned about firms that engage in tax planning activities that can reduce corporate taxes, but at the same time increase the SPCR. Considering the compelling arguments and the “dark” side of more able managers who may engage in opportunistic behaviour, the study provides useful evidence in support of more able managers.Originality/valueThis paper contributes to the SPCR literature by examining the effect of managerial ability on the likelihood of tax avoidance causing SPCR. Able managers are likely to lower the risk faced by investors and are less likely to extract rent and manipulate information. Therefore, the findings of this study have implications for investors by informing them of the negative value implications of tax avoidance and how they can be mitigated by hiring more able managers.

Organized labor, corporate governance, and stock price crash risk

2017 ◽  
Vol 16 (4) ◽  
pp. 424-443 ◽  
Author(s):  
Qunfeng Liao ◽  
Bo Ouyang
Keyword(s):  
Corporate Governance ◽  
Least Squares ◽  
Labor Unions ◽  
Stock Price ◽  
Negative Impact ◽  
Labor Union ◽  
Ordinary Least Squares ◽  
Crash Risk ◽  
Content Type ◽  
Managerial Opportunism

Purpose The aim of the paper is to investigate the effect of labor strength on stock price crash risk and related moderating mechanisms. Design/methodology/approach To examine the relationship between labor unions and stock price crash risk and, more importantly, whether corporate governance moderates this relationship. Ordinary least squares (OLS), two-stage least squares, cross-sectional analyses, industry-level regressions and firm-level regressions are conducted. Findings The results suggest a negative impact of labor union strength on stock price crash risk. Further analysis suggests strong corporate governance mechanisms may mitigate the increased stock price crash risk in less-unionized firms. Originality/value Labor unions have a long-term horizon in the firm and have strong incentives to monitor managerial opportunism. However, labor unions may also increase financial reporting opacity and collude with managers to gain bargaining power in labor negotiations. The authors’ finding suggests that labor union strength is negatively associated with stock price crash risk. This finding is consistent with the notion that labor unions curb managerial opportunism in information disclosure, resulting in reduced crash risk. More importantly, the authors find corporate governance mitigates the negative impact of reduced unionization on crash risk, providing empirical support for recent regulatory efforts to strengthen corporate governance to prevent stock market crash.

An assessment of corporate governance reforms in Italy based on a comparative analysis of earnings management

2014 ◽  
Vol 14 (3) ◽  
pp. 407-423 ◽  
Author(s):  
Domenico Campa ◽  
Ray Donnelly
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Good Governance ◽  
Firm Level ◽  
Content Type ◽  
Good Corporate Governance ◽  
The Uk ◽  
The Impact ◽  
Corporate Governance Reforms ◽  
Governance Reforms

Purpose – The purpose of this paper is to evaluate the impact of corporate governance reforms in Italy. Design/methodology/approach – The authors argue that the effectiveness of corporate governance can best be assessed with reference to the choices made by management or controlling shareholders. They use the curtailment of earnings management as a desirable and measureable outcome of good corporate governance to assess Italy’s progress since the 1990s. The UK is used as a reference point because it is a European Union (EU) economy of comparable size and there is evidence that its firms managed earnings to a much lesser extent than their counterparts in Italy in the 1990s. A matched sample of UK and Italian firms was used for the empirical analysis. Findings – It was found that in contrast to the situation in the 1990s, firms in Italy do not manage earnings to a greater extent than their UK counterparts after the corporate governance reforms. In addition, firm-level governance has a greater effect on earnings management in Italy than in the UK. The authors attribute this to firm-level governance compensating for deficiencies in national institutions. Research limitations/implications – The restriction of earnings management is just one positive consequence of good governance. Other positive outcomes require to be studied to form a complete picture of the impact of governance reforms in Italy. Originality/value – This paper is the first to use an outcome-driven approach to evaluate the impact of governance reforms.

scholarly journals The effect of good corporate governance mechanism and corporate social responsibility on financial performance with earnings management as mediating variable

2018 ◽  
Vol 3 (1) ◽  
pp. 41-60 ◽  
Author(s):  
Mayang Mahrani ◽  
Noorlailie Soewarno
Keyword(s):  
Corporate Governance ◽  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Earnings Management ◽  
Financial Performance ◽  
Partial Least Square ◽  
Least Square ◽  
Content Type ◽  
Good Corporate Governance ◽  
Corporate Social

Purpose The purpose of this paper is to determine the direct influence of the mechanism of good corporate governance (GCG) and corporate social responsibility (CSR) on financial performance as well as through earnings management as a mediating variable. Design/methodology/approach The data used in this research are secondary data involving 102 companies listed on the Indonesian Stock Exchange for the period 2014. The data used in this study were analyzed using partial least square and carried out with the help of software WarpPLS 5.0. Findings The results show that the mechanism of GCG and CSR has a positive effect on financial performance as well as the CSR on financial performance. Originality/value The results also show partial mediation of earnings management on impact of GCG mechanisms on financial performance and full mediation of earnings management on impact of CSR on financial performance.

Does corporate governance shape the relationship between corporate social responsibility and financial performance?

2017 ◽  
Vol 29 (2) ◽  
pp. 227-258 ◽  
Author(s):  
Rezaul Kabir ◽  
Hanh Minh Thai
Keyword(s):  
Corporate Governance ◽  
Financial Performance ◽  
Least Squares ◽  
Ordinary Least Squares ◽  
State Ownership ◽  
Moderating Effect ◽  
Board Independence ◽  
Board Size ◽  
Content Type ◽  
Corporate Social

Purpose The theoretical and empirical relationships between corporate social responsibility (CSR) and corporate financial performance are not without controversy. Yet, CSR activities are increasingly undertaken by a large number of firms, not only in developed countries but also in emerging countries. This paper aims to investigate the moderating effect of different aspects of corporate governance, which are foreign and state ownership, board size and board independence, on the relationship between CSR and financial performance. Design/methodology/approach A sample of Vietnamese listed firms is analyzed. Robust regression analysis is performed using ordinary least squares as well as fixed-effects and two-stage least squares model. Findings Ordinary least squares regression results show that CSR activities affect the financial performance of firms positively. Furthermore, corporate governance features like foreign ownership, board size and board independence strengthen the positive relationship between CSR and financial performance, but there is no such impact of state ownership. Originality/value Previous studies mostly investigate the direct effect of CSR on financial performance. A few studies examine the moderating effect of corporate governance, which is ownership concentration and board gender diversity. As an emerging country, Vietnam has some specific characteristics on corporate governance. This paper contributes by investigating the moderating effect of few major aspects of corporate governance, which are foreign and state ownership, board size and board independence.

Corporate governance and social responsibility

2015 ◽  
Vol 57 (1) ◽  
pp. 38-52 ◽  
Author(s):  
Marty Stuebs ◽  
Li Sun
Keyword(s):  
Corporate Governance ◽  
Social Responsibility ◽  
Good Governance ◽  
Positive Association ◽  
Individual Investors ◽  
Governance Mechanisms ◽  
Content Type ◽  
Good Corporate Governance ◽  
Corporate Governance Mechanisms ◽  
Corporate Social

Purpose – This paper aims to draw on the stakeholder theory to examine the association between corporate governance and social responsibility. Design/methodology/approach – This paper hypothesized that corporate governance is positively associated with corporate social responsibility (CSR), and good corporate governance also leads to good social responsibility in the following year. Corporate governance was measured by using the corporate governance index provided by Brown and Caylor (2006, 2009). CSR data come from Kinder, Lydenberg and Domini (KLD), Inc. Findings – Regression analysis documents significant evidence to support a positive association between corporate governance and social responsibility. Evidence suggests that good governance leads to good CSR performance. Originality/value – The results should interest managers who engage in behavior leading to or maintaining strong corporate governance mechanisms, financial analysts who conduct research on corporate governance and firm performance and policymakers who design and implement guidelines on corporate governance mechanisms. Moreover, results of this study can increase individual investors’ confidence in investing in companies with stronger corporate governance.

An examination of SEC revenue recognition comments and IPO earnings management

2018 ◽  
Vol 31 (3) ◽  
pp. 371-387 ◽  
Author(s):  
Michael Schuldt ◽  
Jose Vega
Keyword(s):  
Earnings Management ◽  
Initial Public Offerings ◽  
Positive Association ◽  
The United States ◽  
Ordinary Least Squares ◽  
Least Squares Regression ◽  
Revenue Recognition ◽  
Content Type ◽  
Management Measures ◽  
Regulatory Scrutiny

Purpose The purpose of this study is to examine the association between revenue-based earnings management in the periods immediately before and after firms’ initial public offerings (IPOs) and regulatory scrutiny by the United States Securities and Exchange Commission (SEC) during review of IPO firms’ registration statements. Design/methodology/approach This paper uses conditional discretionary revenues (Stubben, 2010) as its measure of earnings management, and revenue recognition comments delivered by the SEC as its measure of regulatory scrutiny. The authors use ordinary least squares regression (OLS) models, as well as a supplemental count model, to assess the association between conditional discretionary revenues and revenue recognition comments delivered by the SEC. Findings This study finds evidence of a positive association between earnings management measures in the pre-IPO period and the number of revenue recognition comments received by those firms during the SEC’s review. Furthermore, this study provides evidence that greater numbers of comments are associated with declining earnings management measures in the post-IPO period. However, the evidence suggests that these associations apply only to income-decreasing earnings management. Originality/value This paper extends the IPO earnings management literature by using conditional discretionary revenues as the measure of earnings management, and contributes to a nascent research stream in the accounting literature by investigating the SEC’s comment letter process and its association with, and impact upon, earnings management in the IPO process.

Ownership structure and earnings management: evidence from Jordan

2016 ◽  
Vol 24 (2) ◽  
pp. 135-161 ◽  
Author(s):  
Ebraheem Saleem Salem Alzoubi
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Least Squares ◽  
Financial Reporting ◽  
Ownership Structure ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Financial Reporting Quality ◽  
Cross Sectional ◽  
Content Type

Purpose The purpose of this paper is to examine the association between internal corporate governance mechanism and earnings management of Jordanian companies. More specifically, the author examines several hypotheses regarding the relationships between ownership and earnings management. Design/methodology/approach This study measures the magnitude of discretionary accruals as a proxy for earnings management using the cross-sectional modified Jones model. A number of econometric techniques are used including ordinary least squares and generalized least squares to test the relationship between company ownership and earnings management, using a sample of 62 companies listed on the Amman Stock Exchange. Findings The results revealed that insider managerial ownership, institutional ownership, external blockholder, family ownership and foreign ownership have superior influence on financial reporting quality, as it is, to a greater extent, potentially able to curtail earnings management. The findings contended that the aspects of ownership structure have a significant influence on earnings management, which is in agreement with the theories of corporate governance and opinions that have been highlighted through a number of international bodies. Research limitations/implications Due to lack of data, the paper depends on cross-sectional data applied to isolate abnormal accruals. Practical implications The evidence may be conceivably beneficial as a supporting fundamental for regulatory action, particularly those that affect the ownership structure. The findings have significant implications for regulators as well as supervisors, who will benefit by the comprehension of how ownership structure affects earnings management and enhance financial reporting quality. Originality/value The current research produced its essential contribution through empirically displaying that ownership structure has different implications on earnings management. Moreover, the results recommended that both policymakers and researchers would no longer contemplate ownership structure as a whole, given that ownership structure has different implications on earnings management, measured by the discretionary accruals.

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