Real Earnings Management and Corporate Governance: A Study for Latin America

Abstract

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This paper analyses the impact of both, the ownership structure features and the institutional settings, on real-based activities manipulation based on a sample of listed companies in the underexplored Latin American market for the period of 2004 2016. Using panel data based-GMM system estimator technique, the results confirm some previous literature that the monitoring role of the majority owner is crucial in mitigating the opportunistic behavior of managers in engaging in real activities manipulation that reduces the informative content of financial statements. However, the analysis of the insider ownership revealed the negative impact on transparency that entrenched managers cause. In this case, we observed that as insider ownership increases, managers engage more actively in real earnings management. Other corporate governance tools like the institutional ownership and the quality of the regulatory system demonstrated to be effective mechanisms in reducing the real activities manipulation. Taken together, our results mean that in institutional settings characterized by weak protection of the investors and possible conflicts of interests among shareholders, the oversight by majority shareholder in conjunction with the legal and regulatory framework becomes an important governance mechanism that reduces the managerial discretionary decision making concerning the quality of reported earnings.