Corporate governance and earnings management: going beyond agency theory and secondary data Online publication date: Thu, 16-Sep-2010
by David Alexander
International Journal of Corporate Governance (IJCG), Vol. 2, No. 1, 2010
Abstract: Earnings management has had a consequence in financial disasters such as Enron, WorldCom and Nortel – more recently, it is alleged in the Lehman bankruptcy, which ushered in a global financial meltdown. Yet despite increased regulation and focus on governance and auditing, researchers find that earnings management remains a common practice. Accounting academics have responded to the governance and earnings management issue by conducting studies using secondary data for governance variables and financial models that try to measure earnings management indirectly. Meanwhile, many best practice governance variables have become commonplace with little variability, and there is strong evidence that both the agency causal model and the earnings management measures are seriously flawed. This paper develops a mixed-mode research model based on agency theory and stewardship theory to explain earnings management, and suggests a more direct measure of its occurrence, namely the degree of board information asymmetry.
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