Does Corporate Governance Affect the Relationship Between Earnings Management and Firm Performance? An Endogenous Switching Regression Model

doi:10.1007/s11156-013-0427-z

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Title:	Does Corporate Governance Affect the Relationship Between 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
Keywords:	Corporate governance;Earnings management;Firm performance;Endogenous switching regression model;Discretionary current accruals
Date:	2015-07
Issue Date:	2013-12-27 16:07:02 (UTC+8)
Publisher:	Springer New York LLC
Abstract:	This study investigates whether corporate governance affects the relationship between earnings management and firm performance by using Taiwanese data. We used an endogenous switching regression model to classify firms into strong and weak governance regimes based on an endogenously determined threshold. The results show that discretionary accruals (DAs) and discretionary current accruals (DCAs) have significantly negative effects on return on assets (ROA) and Tobin’s q for firms in a weak governance regime. This implies that managers in weakly governed firms are more likely to abuse accounting discretion than those in strongly governed firms, leading to decreased firm performance. Managers prefer using DCAs rather than DAs to window-dress financial earnings, but this causes a greater reversal of corporate value in the subsequent period. Conversely, DAs and DCAs are positively and significantly related to firm performance in a strong governance regime. This indicates that managers under strong governance typically exercise optimal accounting choices to respond to varied economic conditions, or to avoid costly debt-covenant violations, potentially enhancing firm value.
Relation:	Review of Quantitative Finance and Accounting 45(1), p.33-58
DOI:	10.1007/s11156-013-0427-z
Appears in Collections:	[Graduate Institute & Department of Insurance Insurance] Journal Article

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