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.

Stakeholders’ interest; Avoiding loss; Earnings threshold; Earnings management

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.