Corporate governance and earnings management at large U.S. bank holding companies ☆
Marcia Millon Cornett a, Jamie John McNutt b, Hassan Tehranian c,?
a Bentley University, Waltham, MA 02452-4705, United States
b Southern Illinois University, Carbondale, IL 62901, United States
c Boston College, Chestnut Hill, MA, 02467, United States
a r t i c l e i n f o a b s t r a c t
Article history:
Received 17 October 2008
Received in revised form 23 April 2009
Accepted 30 April 2009
Available online 6 May 2009
This paper examines whether corporate governance mechanisms affect earnings and earningsmanagement at the largest publicly traded bank holding companies in the United States. Wefirst find that performance, earnings management, and corporate governance are endogenouslydetermined. Thus, OLS estimation can lead to biased coefficients and a simultaneous equations
approach is used.We find that CEO pay-for-performance sensitivity (PPS), board independence,and capital are positively related to earnings and that earnings, board independence, and
capital are negatively related to earnings management. We also find that PPS is positivelyrelated to earnings management. Finally, PPS and board independence are positively relatedand the relationship 留學生dissertation網is bidirectional. While both PPS and board independence are associatedwith higher earnings, our results indicate that more independent boards appear to constrainthe earnings management that greater PPS compels.
© 2009 Elsevier B.V. All rights reserved.
JEL classification:
G21
G30
G34
Keywords:
Corporate governance
Earnings management
Financial performance
Financial institutions
1. Introduction
Accountants and financial economists have recognized for years that firms use latitude in accounting rules to manage theirreported earnings in a wide variety of contexts. Healy and Wahlen (1999) conclude in their review article on this topic that theevidence is consistent with earnings management “to window dress financial statements prior to public securities offerings, toincrease corporate managers' compensation and job security, to avoid violating lending contracts, or to reduce regulatory costs orto increase regulatory benefits.”1 Since then, evidence of earnings management has only mounted. For example, Cohen et al.(2004) find that earnings management began to increase steadily around 1997, peaking in 2002. Performance-basedcompensation (e.g., option and stock) emerged as a particularly strong predictor of aggressive accounting behavior in theseyears (see Gao and Shrieves, 2002; Cohen et al., 2004; Bergstresser and Philippon, 2006; Cheng and Warfield, 2005).
While there is an extensive literature on opportunistic earnings management in response to specific incentives to achieve oneresult or another, research looking at the impact of corporate governance on earnings management is quite limited. The few papersThe authors are grateful to Jim Booth, Ozgur Demirtas, Alan Marcus, Tobias Moskowitz, Phil Strahan, Rene Stulz, Anjan Thakor, an anonymous referee, theeditor, David Denis, and seminar participants at Boston College, Southern Illinois University, the Corporate Governance Conference at Rutgers Business School, and#p#分頁標題#e#
the FMA annual meeting in Orlando, FL for their helpful comments.We thank the Whitcomb Center for Research in Financial Services for providing partial researchsupport through the use of the WRDS system.
? Corresponding author. Tel.: +1 617 552 3944.
E-mail address: [email protected] (H. Tehranian).
1 At the extreme, earningsmanagement has resulted in somewidely-reported accounting scandals involving Enron,Merck,WorldCom, andothermajorU.S. corporations.
Congress responded to the spate of corporate scandals thatemerged after 2001with the Sarbanes–OxleyAct passed in June 2002. Sarbanes–Oxley requires public companies
http://www.ttc-switch.com/Thesis_Writing/to make sure their boards' audit committees have experience with applying generally accepted accounting principles (GAAP) to estimates, accruals, and reserves.
0929-1199/$ – see front matter © 2009 Elsevier B.V. All rights reserved.
doi:10.1016/j.jcorpfin.2009.04.003
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Journal of Corporate Finance
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