Earnings management of firms just meeting zero-earnings thresholds: the stakeholders’ perspective
Authors: Shu-hua Lee, Hsueh-Fang Chien, Yann-Ching Tsai, Ling-Ling Chang
Journal: Chiao Da Management Review. Dec. 2015, 35(2): 31-79.
Keywords:
Stakeholders’ interest; Avoiding loss; Earnings threshold; Earnings management
Abstract:
This paper aims to examine whether CEO-board chairperson duality,
board independence, institutional holding, and audit quality affect earnings management behavior of firms that
are just meeting zero-earnings thresholds. The empirical tests are based on the following two perspectives:
the perspective that corporate governance and audit quality can constrain earnings management and the
perspective of stakeholders’ interests and firms’ decisions. Our empirical findings suggest that firms with a
higher proportion of independent board members and higher institutional shareholding are more likely to meet
the zero-earnings thresholds through earnings management. However, we find insignificant results for
CEO-board chairperson duality and audit quality. In summary, the findings support the perspective of the
stakeholders’ interests and the firms’ decisions. In addition, we document the existence of discontinuities
around zero-earnings thresholds in earnings distributions based on the methodology of Jacob and Jorgensen
(2007). Also, discretionary accrual and real activities manipulation are insignificantly different from zer
for firms just meeting zero-earnings thresholds, which supports our assumption that those firms are likely
to involve only an insignificant amount of earnings management.