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The Art of Discretion: Essays on Earnings Management, Governance, and Capital Structure
Stockholm University, Faculty of Social Sciences, Stockholm Business School.
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 [en]
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: urn:nbn:se:su:diva-176316ISBN: 978-91-7797-949-4 (print)ISBN: 978-91-7797-950-0 (electronic)OAI: oai:DiVA.org:su-176316DiVA, id: diva2:1374425
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
List of papers
1. The Joint Effect of Industry Regulation and Corporate Governance on Earnings Management
Open this publication in new window or tab >>The Joint Effect of Industry Regulation and Corporate Governance on Earnings Management
(English)Manuscript (preprint) (Other academic)
Abstract [en]

I investigate the joint effect of corporate governance and industry regulation on earnings management. This joint effect in the form of a substitute and/or a complement effect is still little known. Empirical evidence thus far supports that these two mechanisms are either substitutes or complements in relation to earnings management practices. On the contrary, I analyze these mechanisms as both substitutes and complements. I find that corporate governance and industry regulation are jointly substitutes and complements in their effect on earnings management. I find evidence of a decreasing marginal rate of substitution between them. I also find that these two governance mechanisms are positively associated with discretionary accounting practices, which is consistent with the efficient earnings management hypothesis. However, the joint effect is negatively signed, implying a decrease in earnings management through accounting practices. The policy implication of my findings suggests that regulators and standard-setters should be aware of the changes they make in industry regulation and corporate governance guidelines and the interaction between them, and how this interaction affects the discretionary practices of firms, such as earnings management.

Keywords
Bundle of Governance Mechanisms, Corporate Governance, Industry Regulations, Earnings Management, Substitute and Complement Effects
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-176373 (URN)
Available from: 2019-12-03 Created: 2019-12-03 Last updated: 2019-12-04Bibliographically approved
2. Discretionary Environment and Earnings Management
Open this publication in new window or tab >>Discretionary Environment and Earnings Management
(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
Accrual-generating process, earnings management, discretionary environment
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-176376 (URN)
Available from: 2019-12-03 Created: 2019-12-03 Last updated: 2019-12-04Bibliographically approved
3. Bounded Rationality and the Active Management of Capital Structure
Open this publication in new window or tab >>Bounded Rationality and the Active Management of Capital Structure
(English)Manuscript (preprint) (Other academic)
Abstract [en]

The literature seeks new determinants to explain variations in firm capital structure. The traditional determinants of capital structure assume agents’ rationality through agency theory. However, their rationality in the active management of capital structure is questionable, due to variations observed in corporate leverage policies across firms. One explanation for these variations could be that rational behaviour is circumscribed by different constraints, for example, financial and governance constraints, such that rationality is bounded. Under bounded rationality, managers make satisfactory and sufficient decisions, so-called satisficing decisions. I use a capital adjustment model as a base and transform it into one that estimates the intensity of the active management of capital structure. I do so by adding managers’ traits to estimate their satisficing effects on leverage growth as a measure of the active management of capital structure under a constraint system. I use managerial discretionary index as a measure of managerial traits and I find that the managerial discretionary index is associated with leverage growth, and the differences in the active management of corporate leverage under various constraints are in line with the competing pecking order and trade-off capital structure theories. My findings imply that managerial traits are determinants of the active management of capital structure.

Keywords
Satisficing effect, managerial discretion, active management of capital structure, leverage capacity, governance mechanism
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-176377 (URN)
Available from: 2019-12-03 Created: 2019-12-03 Last updated: 2019-12-04Bibliographically approved

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