Chaur-Shiuh Young, Liu-Ching Tsai , Pei-Gin Hsieh
This study examines whether managers have incentive to manipulate current earnings in Expectation of future performance. In addition, the paper investigates the relation between corporate governance mechanisms and this earnings management behavior. Using Taiwan’s listed companies from 1996 to 2001 as our sample, we find that managers use income-increasing discretionary accruals to borrow from future earnings when current performance is relatively bad and expected future performance is relatively good. Conversely, managers use income-decreasing discretionary accruals to save from current earnings for a good future when current performance is relatively good and expected future performance is relatively bad. In addition, our evidence indicates that both greater board independence and larger external blockholder ownership can effectively inhibit managers from income-increasing earnings management behavior. However, they are unable to restrain managers’ income-decreasing earnings manipulation behavior. We also find that discretionary accruals are significantly and positively related to outside director shareholding ratio. This holds for managers’ both income-increasing and income-decreasing incentives, indicating that companies with greater outside directors shareholding ratio have a tendency to have good current period performance as a result of outside directors’ concern for the value of their own stocks. Finally, this study does not find any evidence that institutional shareholding is effective in monitoring managers’ earnings manipulation behavior.
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