The Impact of Corporate Governance and Accruals Flexibility on the Interaction between Earnings Management Strategies

Abstract

This study examines the impact of corporate governance mechanisms and accruals flexibility on the interaction between accruals earnings management (AEM) and real earnings management (REM) using a large sample of Indian firms for the period 2007–2015. The results show significant impact of board effectiveness, audit committee effectiveness, high auditor’s quality and accruals flexibility on the level of AEM, and also we find significant relations between the level of REM and AEM, suggesting that managers may switch from AEM to REM when they find constraints on AEM. Additional analysis of firms with relatively strong earnings management incentives confirms the trade-off between AEM and REM. Our findings are also robust to the alternative measure of earnings management.