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Discretionary Environment and Earnings Management
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.ORCID iD: 0000-0003-3676-1007
(English)Manuscript (preprint) (Other academic)
Abstract [en]

A firm’s reported earnings are an important indicator of its profitability. The quality of reported earnings depends crucially on how accruals are generated in the firm. The accrual-generating process (AGP) is under the influence of managers’ discretionary objectives. Whereas previous research uses accrual-based earnings management models to study how the AGP affects earnings quality, this study goes beyond managerial discretion and considers the firm’s entire discretionary environment as a determinant of the AGP. The discretionary environment consists of the governance mechanisms and contextual mechanisms (e.g. industry regulation and competitiveness) that affect managerial discretion and, thus, the AGP. This study augments an earnings management model with the discretionary environment, adjusting for AGP heterogeneities due to firm-specific governance and contextual mechanisms. The empirical results show clear evidence of the importance of the discretionary environment as a determinant of the AGP (and, thus, earnings management). The results imply that a firm’s entire discretionary environment can be used to gain a clearer picture of its earnings management preferences and to determine the earnings quality.

Keywords [en]
Accrual-generating process, earnings management, discretionary environment
National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-176376OAI: oai:DiVA.org:su-176376DiVA, id: diva2:1375013
Available from: 2019-12-03 Created: 2019-12-03 Last updated: 2019-12-04Bibliographically approved
In thesis
1. The Art of Discretion: Essays on Earnings Management, Governance, and Capital Structure
Open this publication in new window or tab >>The Art of Discretion: Essays on Earnings Management, Governance, and Capital Structure
2020 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This dissertation is a compilation of three articles on earnings management, governance and capital structure. In addition to these three articles, the introductory chapter establishes the link between these articles and summarizes them.

Article I investigates the joint effect of governance mechanisms on earnings management. This study finds evidence in support of imperfect substitution and complement effects of corporate governance and industry regulation on earnings management.

Article II investigates the role of the discretionary environment for earnings management, using several measures of governance and contextual mechanisms. The findings of this article show that the discretionary environment matters in explaining earnings management practices. Therefore, the use of a tractable and quantifiable measure of the discretionary environment has the potential to refine measures of earnings management and mitigate the mixed inferences made from these measures in the literature. Hence, this study contributes to the literature by augmenting accrual-based earnings management models with governance and contextual mechanisms.

Article III examines the role of managerial traits in the active management of capital structure within the boundaries of a system of financial and governance constraints. The findings of this article show that the managerial discretionary index as a measure of managerial traits is associated with leverage growth and the satisficing effect is statistically significant. The results also show that the association is nonlinear under some combinations of financial and governance constraints (relatively low and high constraints), and linear in others.

Place, publisher, year, edition, pages
Stockholm: Stockholm Business School, Stockholm University, 2020. p. 17
Keywords
earnings management, accruals modelling, corporate governance, industry regulation, capital structure, bounded rationality, substitution effect, complement effect
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-176316 (URN)978-91-7797-949-4 (ISBN)978-91-7797-950-0 (ISBN)
Public defence
2020-01-30, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 13:00 (English)
Opponent
Supervisors
Note

At the time of the doctoral defense, the following papers were unpublished and had a status as follows: Paper 1: Manuscript. Paper 2: Manuscript. Paper 3: Manuscript.

Available from: 2020-01-07 Created: 2019-12-01 Last updated: 2019-12-13Bibliographically approved

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CiteExportLink to record
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Citation style
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