Corporate Governance, Earnings Management, and Firm Performance: An Endogenous Switching Regression Model

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Title:	Corporate Governance, Earnings Management, and Firm Performance: An Endogenous Switching Regression Model
Authors:	Tang, Hui-wen;Chang, Chong-Chuo
Contributors:	淡江大學保險學系
Date:	2011-09-26
Issue Date:	2013-10-18 12:28:42 (UTC+8)
Abstract:	This paper employs an endogenous switching regression model (ESRM) to investigate the relation between earnings management and firm performance under different governance status. We find that both discretionary accruals (DA) and discretionary current accruals (DCA) have a significantly negative impact on ROA and Tobin’s Q for firms classified as into a weak governance regime. The results imply that these firms suffer severe agency problems and information asymmetry. Thus, corporate managers of the regime are likely to window dress earnings through accounting discretion, resulting in a reversal of operating performance and stock returns in subsequent periods. On the contrary, we find that DA and DCA are positive and significant associated with ROA and Tobin’s Q in the strong governance regime. These findings imply that the managers of a strong governance firm would select accounting policies that best reflect economic events, transactions and cash-flow. Therefore, the choice of accounting method under good corporate governance does not harm firm performance but increase firm value. It is also interesting to note that managers prefer to use DCA to window dress financial figures than DA, leading to a more serious reversal of firm value in the next period.
Relation:	World Business, Economics and Finance Conference
Appears in Collections:	[Graduate Institute & Department of Insurance Insurance] Proceeding

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