Evaluation of Risk as Conducive Environment for Earning Manipulation and Moderation Effect of Corporate Governance: Empirical Study of Listed Indian Firms
Restricted accessResearch articleFirst published online March, 2022
Evaluation of Risk as Conducive Environment for Earning Manipulation and Moderation Effect of Corporate Governance: Empirical Study of Listed Indian Firms
Separation of decision-making and risk-bearing functions in dispersed ownership structures offer scope for opportunistic behaviour of managers. Hence necessitate proactive governing mechanism for ratification and monitoring of decisions from the initiation and implementation of the decisions for protection of shareholders as well as stake holders interest. The motive of this paper is to evaluate whether risky behaviour provide conducive environment for earning manipulation and analyze the moderating effect of corporate governance (CG) and ownership attributes in reducing earnings management practices in high risk conditions. A structural Partial least square (PLS) equations model was developed to analyze the relationship and CG constructs moderating role was evaluated. Based on a sample of 270 listed Indian firms in NSE during the period of 9 years from 2007–2008 to 2015–2016 using smart-PLS, it was detected that market risk, financing and investing risk manifold opportunities of managers to maximise their own benefits by manipulating the information in their discretion (discretionary accruals measured through modified Jones Model). CG mechanism constructs like audit, risk and compensation committees, board activities, board characteristics, transparency have been found significant in moderating the relationship between risk and earning management while board composition and ownership structure have failed to restrain the opportunistic behaviour of managers in favourable risky environment contradicting acceptance of efficient monitoring hypothesis and resource based view in India corporate setting.
AdamsR., & MehranH. (2003). Is corporate governance different for bank holding companies?Economic Policy Review, 9(1), 123–142.
2.
AgrawalA., & JayaramanN. (1994). The dividend policies of all-equity firms: A direct test of the free cash flow theory. Managerial and Decision Economics, 15(2), 139–148.
3.
BartovE., GulF., & TsuiJ. (2000, January). Discretionary-Accruals models and audit qualifications (Working paper SSRN). New York University.
4.
BalsamS. (1998). Discretionary accounting choices and CEO com- pensation. Contemporary Accounting Research, 15, 229–252.
5.
BernankeB., GertlerM., & GilchristS. (1996). The financial accelerator and the flight to quality. The Review of Economics and Statistics, 78(1), 1–15.
6.
BhagatS., & WelchI. (1995). Corporate research & development investments international comparisons. Journal of Accounting and Economics, 19(2–3), 443–470.
7.
BoubakerS., DerouicheI., & NguyenD. K. (2013). Does the board of directors affect cash holdings? A study of French listed firms. Journal of Management & Governance, 19(2), 341–370.
8.
BrancoM. C., & RodriguesL. L. (2006). Positioning stakeholder theory within the debate on corporate on corporate social responsibility. Electronic Journal of Business Ethics and Organizational Studies, 12(1), 61–80.
9.
BukitR., & IskandarT. M. (2009). Surplus free cash flow, earnings management, and audit committee. International Journal of Economics and Management, 3(1) 204–223.
10.
BusruS. A., & ShanmugasundaramG. (2017). Effects of innovation investment on profitability and moderating role of corporate governance: Empirical study of Indian listed firms. Indian Journal of Corporate Governance, 10(2), 97–117.
11.
CampbellK., & Minguez-VeraA. (2008). Gender diversity in the boardroom and firm financial performance. Journal of Business Ethics, 83, 435–451.
12.
ChungR., FirthM., & KimJ. B. (2005). Earnings management, surplus free cash flow, and external monitoring. Journal of Business Research, 58(6), 766–776.
13.
CongerJ. A., FinegoldD., & LawlerE. E.III (1998). Appraising boardroom performance. Harvard Business Review, 76(1), 136–148.
14.
CoreJ., & GuayW. (1999). The use of equity grants to manage optimal equity incentive levels. Journal of Accounting and Economics, 28(2), 151–184.
15.
DavisonA. C., & HinkleyD. V. (1997). Bootstrap methods and their application. Cambridge University Press.
16.
DeAngeloL. (1986). Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders. Review, 61, 400–420.
17.
DechowP., RichardsonS., & TunaI. (2003). Why are earnings kinky? A reexamination of the earnings management explanation. Review of Accounting Studies, 8, 335–384.
18.
DechowP., & SkinnerD. (2000). Earnings management: Reconciling the views of accounting academics, practitioners, and regulators. Accounting Horizons, 14(2), 235–250.
19.
DechowP., SloanR., & SweeneyA. (1996). Causes and consequences of earnings manipulation and analysis of firm’s subject to enforcement by the SEC. Contemporary Accounting Research, 13(1), 1–36.
20.
DijkstraT. K., & HenselerJ. (2011). Linear indices in nonlinear structural equation models: best fitting proper indices and other composites. Quality & Quantity, 45(6), 1505e1518.
21.
DjamaC., DumasG., & MartinezI. (2011). L’innovation: une incitation à la gestion des resultats?Post-Print hal.
22.
EfronB., & TibshiraniR. (1986). Bootstrap methods for standard errors, confidence intervals, and other measures of statistical accuracy. Statistical Science, 1, 54–75.
23.
FrancisJ. R., RichardC., & VanstraelenA. (2009). Assessing France’s joint audit requirement: Are two heads better than one?Auditing: A Journal of Practice and Theory, 28(2) 35–63.
24.
FRC. (2010). Council, financial reporting, and Great Britain. The UK Corporate Governance Code, June 2010. Financial Reporting Council.
25.
GaverJ. J., & GaverK. M. (1998). The relation between nonrecurring accounting transactions and CEO cash compensation. The Accounting Review, 73, 235–253.
26.
GuidaraR., & BoujelbeneY., (2014). R&D-based earnings management and accounting performance motivation. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(2), 85–97.
27.
GuidryF., LeoneA., & RockS. (1999). Earnings-based bonus plans and earnings management by business-unit managers. Journal of Accounting and Economics, 26, 113–142.
28.
HairJ. F., HultG. T. M., RingleC. M., & SarstedtM. (2013). A primer on partial least squares structural equation modeling (PLS-SEM). SAGE Publications.
29.
HealyP. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7, 85–107.
30.
HealyP., & WahlenJ. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13, 365–84.
31.
HolthausenR. W., LarckerD. F., & SloanR. G. (1995). Annual bonus schemes and the manipulation of earnings. Journal of Accounting and Economics, 19, 29–74.
32.
HuangY. S., & WangC. J. (2015). Corporate governance and risk-taking of Chinese firms: The role of board size. International Review of Economics & Finance, 37, 96–113.
33.
HuntA., MoyerS., & ShevlinT. (2000). Earnings volatility, earnings management, and equity value (unpublished working paper). University of Washington.
34.
JaggiB., & LeeP. (2002). Earnings management response to debt covenant violations and debt restructuring. Journal of Accounting, Auditing, and Finance, 17(4), 295–324.
35.
JensenM. (2002). Value maximization and the corporate objective function. In AndriofJ., WaddockS., RahmanS. & HustedB. (Eds), Unfolding stakeholder thinking. Greenleaf Publishing.
36.
JensenM. C., & MecklingW. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305–360.
37.
KleinA. (2002). Audit committee, board of director characteristics, and earning management. Journal of Accounting and Economics, 33, 375–400.
38.
KothariS. P. (2001). Capital markets research in accounting. Journal of Accounting and Economics, 31(1–3), 105–231.
39.
KrainerE. (1999). Risk sharing, return sharing, and arbitrages: A contribution to the corporate finance of business cycles (Working paper). Wisconsin School of Business
40.
LiptonM., & LorschJ. (1992). A modest proposal for improved corporate governance. Business Lawyer, 48(1), 59–77.
41.
ModiglianiF., & PogueG. A. (1997, March). An introduction to risk and return concepts and evidence. Financial Analysts Journal, 30(3), 69–86.
42.
NeffatiA., FredI. B., & SchalckC. (2011). Earnings management, risk and corporate governance in US Companies. Corporate Ownership & Control, 8(2). 10.22495/cocv8i2c1p2
43.
NekhiliM., & PoincelotE. (2000). La fonction R & D et la latitude managériale: uneanalysentthéorique. Revue Finance ContrôleStratégie, revues.org, 3(1), 5–28.
44.
NekhiliM., WaliS. A., & Chebbi-NekhiliD. (2009). Free- cash-flow, gouvernance et politiquefinancière des entreprisesfrançaises. Finance ContrôleStratégie, 12(1), 5–31.
45.
NunnallyJ. C. (1978). Psychometric theory (2nd ed.). McGraw- Hill.
46.
NyatichiV. (2016). Moderating influenced of board diversity and directors compensation on corporate governance structure and financial performance of the companies listed on the Nairobi Stock Exchange. International Journal Account Research, 4, 136. 10.4172/2472-114X.1000136
47.
Peltier-RivestD. (1999) The determinants of accounting choices in troubled companies. Quarterly Journal of Business and Economics, 38(4), 28–44.
48.
PiotC., & JaninR. (2007). External auditors, audit committees and earnings management in France. European Accounting Review, 16(2) 429–454.
49.
RichardsonS. (2006). Over-investment of free cash flow and corporate governance. Review of Accounting Studies, 11(2–3), 159–189.
50.
RusminR., AstamiE. W., & HartadiB. (2014). The impact of surplus free cash flow and audit quality on earnings management: The case of growth triangle countries. Asian Review of Accounting, 22(3), 217–232.
SercuP. & VinaimontT. (2006). The forward bias in the ECU: Peso risks vs. fads and fashions. Journal of Banking and Finance, 30(8), 2409–2432.
53.
ShleiferA., & VishnyR. (1997). Survey of corporate governance. Journal of Finance, 52(2), 737–783.
54.
Smith JrC. W., & WattsR. L. (1992). The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics, 32(3), 263–292
55.
SrinidhiB. N., & GulF. A. (2007). The differential effects of auditors’ non-audit and audit fees on accrual quality. Contemporary Accounting Research, 24(2), 595–629.
56.
StolowyH., & BretonG. (2000). A framework for the classification of accounts manipulations (LesCahiers de Recherche HEC Paris, No 708). University du Quebec, Montreal.
57.
TeohS., WelchI., & WongT. (1998). Earnings management and the long-run market performance of seasoned equity offerings. Journal of Financial Economics, 50, 63–90.
58.
UwuigbeU., AmiolemenO. O., UwuigbeO. R., AsiriuwaO., & JafaruJ. (2017). Disclosure quality and earnings management of selected Nigerian banks. The Journal of Internet Banking and Commerce, 1–12.
59.
VefeasN. (1999). Board meeting frequency and firm performance. Journal of Financial Economics, 53, 113–142.
60.
WangZ. (2012). Corporate governance under state control: The Chinese experience. Theoretical Inquiries in Law, 13(2), 487–502.
61.
WoldH. (1982). Soft modeling: The basic design and some extensions. In JoreskogK. G. & WoldH. (Eds), € Systems under indirect observations: Part II. North-Holland.
62.
YermackD. (1995). Do corporations award CEO stock options effectively?. Journal of Financial Economics, 39(2–3), 237–269.
63.
ZamriN., RahmanR. A., & MohdIsaN. S. (2013). The impact of leverage on real earnings management. Procedia Economics and Finance, 7, 86–95.
