Discretionary Environment and Earnings Management
This study adds the discretionary environment to the accrual-based earnings management model by Kothari, Leone and Wasely (2005) to control for the effect of an open system of governance and enhance the inferences made from earnings management proxies. In doing so the Governance-Augmented Earnings Management model controls for unobserved heterogeneities in earnings management practices. The findings of this study show that the proxies of the discretionary environment are associated with total accruals, hence they have the potential to explain the discretionary earnings management practices. Further, I relax the assumptions of firms’ stationarity and industry homogeneity of accruals and by doing so I find evidence in support of panel unit root and panel cointegration, which indicate the need for a rigorous modelling attempt. As a result, the panel cointegrated regression method which allows for heterogeneities is used to model the total accruals and produce heterogeneously determined decomposed earnings management proxies. The findings of this study implies that the mixed results in the literature obtained by applying the proxies of earnings management can be due to unobservable heterogeneities in discretionary earnings management practices by managers which at least partly can become explained by proxies of the discretionary environment and considering these heterogeneities in the modelling of the proxies.
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Bundle of Governance Mechanisms; Industry Regulation and Corporate Governance: Jointly Substitutes and Complements?
This study investigates the empirical question of joint substitutability and complementarity of mechanisms within governance bundles, the corporate governance and industry regulation, on earnings management. This study finds that managers’ earnings management are more responsive to high quality governance bundles and effect of corporate governance is modified in relatively highly regulated industries on earnings management practices. Governance bundles with relatively high quality mechanisms have lower rate of substitutability and complementarity on earnings management practices compared to bundles of relatively highly regulated with low quality corporate governance structure. These evidence support heterogeneous effect of governance bundles on earnings management policies, imperfect substitutability and complementarity, as well as diminishing marginal rate of substitution between mechanisms within governance bundles in relation to earnings management policies. The imperfect substitutability and complementarity of governance bundles’ mechanisms in relation to earnings management explains interaction of the mechanisms within these bundles and their modifying effect on earnings management and it contributes to understanding of theory of “Bundle of Governance Mechanisms” by Ward et al. (2009). The evidence obtained by this study shows that mechanisms within governance bundles should be developed and applied simultaneously, and the external stakeholders’ impact on practices like earnings management internal to the firms can be greater than expected through external mechanisms’ substitute and complementarity effects for the internal mechanisms.
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