Corporate Governance And Earnings Management: A Survey Of Literature

Abstract

Corporate governance can reduce or even eliminate the extent of earnings management. Normally, an institutional environment that provides better legal protection can control managers’ self-interest to a certain extent. Takeover force can exert market pressure on managers to do the best for shareholders. Prior studies have investigated different corporate governance mechanisms that can have negative relationships with earnings management. Board independence can enhance certain monitoring behaviors in managers, including the misappropriation of assets. Female directors can develop trust leadership, which requires managers to share information, and are more likely to be risk-averse to frauds and opportunistic earnings management. An audit committee can oversee the internal control for financial reporting and the quality of financial information. Directors with financial expertise can provide incremental control effects on earnings management, especially in firms with weak corporate governance. This paper contributes to corporate governance by providing detailed reviews of different corporate governance mechanisms, reviewing the latest findings on classification shifting, and summarizing earnings management measures, including a new diagnostic system. In the future, this new diagnostic system may be investigated in different contexts.