The relationship between external financing activities and earnings management: Evidence from enterprise risk management

Teng Shih Wang, Yi Mien Lin, Edward M. Werner, Hsihui Chang

Research output: Contribution to journalArticlepeer-review

16 Scopus citations

Abstract

This study examines the impact of external financing activities on earnings management decisions and further explores the role of enterprise risk management (ERM) as a potential moderating factor in this association. We find that managers use both real-activities and accrual-based earnings management when engaging in equity financing activities. Moreover, when firms have weaker ERM systems, we find that managers are less likely to use real-activities earnings management in their equity financing efforts. Therefore, our policy-relevant findings suggest that weaker ERM systems can signal poor control mechanisms and attract additional investor scrutiny, thus constraining managers’ use of real-activities earnings manipulation to harm long-term firm value.

Original languageEnglish (US)
Pages (from-to)312-329
Number of pages18
JournalInternational Review of Economics and Finance
Volume58
DOIs
StatePublished - Nov 2018

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Accrual-based earnings management
  • Corporate governance
  • Enterprise risk management
  • External financing activities
  • Real activities earnings management

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