HOW CORPORATE GOVERNANCE IS RELATED TO

DISCLOSURES

Nefeli Asimakopoulou 343873

Giorgos Ntokos 342385

ABSTRACT

In this study we elaborate on earnings management and voluntary disclosure

literature by providing evidence of whether specific corporate governance
characteristics are related to both the existence of earnings management and the
quality of voluntary disclosures. A lot of studies have focused on the relation of
corporate governance with each one of these topics, but to the best of our knowledge,
no research so far has investigated the two topics in combination and with relation to
corporate governance features. We want to examine whether the extent of earnings
management and the level of voluntary disclosures will be affected in the same
direction, meaning positively or negatively, by the existence of the same corporate
governance attributes.

February 2011
Erasmus University, Rotterdam
 1. Introduction

The aim of this study is to investigate the interaction between corporate governance,
earnings management and voluntary disclosures. Earnings management and voluntary
disclosures are both hot topics in financial accounting given their impact on financial
markets and investors’ decisions.
Recognition and disclosure is the main means the companies employ to communicate
their financial performance to all the interested parties. “Disclosure refers to the process of
providing information about items in the financial statements, via footnotes, supplementary
schedules, or other means, while recognition refers to the process of formally including
items, in numbers, in the financial statements” (FASB 1984).
As for earnings management there are a lot of definitions in the existing literature. The
most relevant ones come from Schipper (1989): “a purposeful intervention in the external
financial reporting process, with the intent of obtaining some private gain (as opposed to,
say, merely facilitating the neutral operation of the process” and Healy and Wahlen (1999):
“Earning management occurs when management use judgment in financial reporting and in
structuring transactions to alter financial reports to either mislead some stakeholders about
the underlying economic performance of the company or to influence contractual outcomes
that depend on reported accounting numbers.”
Voluntary disclosures have a direct connection to earnings management. The practice
of earnings management is mostly supported by the flexibility offered by the accounting
standards. Flexibility according to C.D. Knoops is defined as the opportunity offered by the
accounting standards to adapt the presentation of accounting information. At the same time
disclosures and especially voluntary disclosures are employed by the companies to provide
additional information to investors in order to affect their investing activities.
Our approach is to elaborate on these two topics by providing evidence of whether
specific corporate governance characteristics are related to both the existence of earnings
management and the quality of voluntary disclosures. A lot of studies have focused on the
relation of corporate governance with each of these topics, but to the best of our knowledge,
no research so far has investigated the two topics in combination and with relation to
corporate governance features.
In other words we want to examine whether the extent of earnings management (if it
exists) and the level of voluntary disclosures will be affected in the same direction, meaning
positively or negatively, by the existence of the same corporate governance attributes. Our

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research question could be defined as: “Does corporate governance affect in the same way
earnings management existence and the quality of voluntary disclosures?”
Many accounting scandals in the early 00’ (Enron, Adelphia Communication and
WorldCom) signalled the increased need for sound monitoring mechanisms and transparent
corporate control. The implementation and maintenance of strong corporate governance
structure was more prominent than ever. Regulations such as the Sarbanes-Oxley Act in
2002 strengthened the notion that the presence of powerful corporate governance can
enhance the transparency and credibility of reported information.
In this respect, we believe that our research would be of great value for both users and
regulators in their effort to estimate the usefulness and validity of financial statements.
Moreover, due to the innovative variables that we will introduce (i.e. Social Exposure of
CEO, CEO age, etc), and in case that they will be proven to have an impact on earnings
management and voluntary disclosures, investors and stakeholders could have a primary
view of the potential management’s involvement in these two practices.
Our research will be based on two regression models. Each one will examine the
relation of corporate governance characteristics separately with earnings management and
voluntary disclosures. Our analysis will focus on the sign of the coefficient of the corporate
governance variables in order to examine whether these affect with the same way and at the
same time both earnings management and voluntary disclosures. Earnings management will
be proxied by the modified Jones Model. Voluntary Disclosures will be measured by a self-
contracted index based on the disclosure index designed by Botosan (1997).
Our expectations for the outcome are that earnings management and voluntary
disclosures will be inversely associated with corporate governance. According to Nanda et
al. (2008), firms with better (worse) earnings quality have more (fewer) voluntary
disclosures. Provided that earnings of good quality reduce the possibility of earnings
management, earnings management and voluntary disclosures will have negative relation.
Moreover their results suggested that earnings quality has an impact on voluntary disclosure
rather than disclosure practices affect the quality of earnings in a firm.
Shaw (2003) investigated the relation between disclosures and recognition practices
and concluded that disclosure quality ratings are reversely associated with discretionary
accruals, claiming that firms with better disclosures are more reluctant in recognising
accruals. Moreover Dutta and Gigler (2002) developed their theory of the connection
between earnings management and voluntary management forecasts using the agency theory
as a basis. They considered earnings management as “a deliberate manipulative action
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choice that the manager makes after privately observing the firm's true or economic
earnings”. Similarly they concluded that earnings management is less likely in the presence
of earnings forecast, a form of voluntary disclosure.
The abovementioned literature implies that since the relation between the two
dimensions is negative, we expect to see the same relation if they are regressed against the
same corporate governance characteristics.
The remainder of this study is organised as follows. Section 2 provides the different
theoretical approaches in the study of first earnings management and then of voluntary
disclosures with a link between them and corporate governance. Section 3 provides a
detailed review of prior research in the association of corporate governance with earnings
management and voluntary disclosures. In Section 4 we analyse our predictions for the new
variables. In Section 5 we introduced our hypotheses, sample, methodology and the
measurements used for all variables. Finally section 6 consists of our conclusion. In
Appendix we summarized in a list all the prior research findings.

2. Earnings management and voluntary disclosures: Theoretical

Approach

A great researching interest is oriented to the importance and implications of both

earnings management and voluntary disclosures in financial reporting practices the last
decade, especially after the debacles of many corporate scandals in the U.S that brought to
the spotlight the need of stakeholders for transparent and reliable information.
Earnings management has always been a hot topic for accounting science and business
management in general due to its severe implications on the perception of firm’s overall
performance by stakeholders and the potential of employing it by managers or large block
holders in order to expropriate shareholders.
This tactic may be implemented either through real transactions or through the
adoption of different accounting methods. In this research we will focus on the investigation
of the last and its relation to the corporate governance and voluntary disclosures. This topic
has become prominent since 2002 and the big accounting scandals that were revealed
regarding a number of large companies.
Earnings management, which has been defined by Schipper (1989) as “a purposeful
intervention in the external financial reporting process, with the intent of obtaining some

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private benefit”, has been associated with a large number of theories that are trying to
explain it.
The first approach relates earnings management with specific events in a firms’
lifetime such as Initial Public Offerings (IPOs). These researches approach the topic as an
instrument to increase the value of the firm just before the event. Some important researches
in this relation are implemented by Teoh et al (1998) and Darough and Rangan (2006), who
find that the two concepts are closely affined.
Another approach is that of earnings management and income smoothing. In fact,
income smoothing is a particular form of earnings management, Stlowy and Breton (2004),
and its main goal is to reduce the deviations in the firms’ profit in order to present a steadier
and more creditable performance. Tucker and Zarowin (2006), Ahmad and Mansor (2009),
and Shen and Chih (2007) have contributed in this perception but there is still a long way to
explain the incentives for income smoothing.
Moreover, researches have been implemented about the deviations in the use of
earnings management across the countries in order to identify prospective impacts of
differences in regulations and legislations.
Finally, researches have been implemented on how corporate governance affects
managers in engaging in this kind of behavior. Specific characteristics have been measured
in cases of firms that have used earnings management to examine the degree of impact for
each of this characteristic. Characteristics such as board independence, audit committee,
ownership concentration and meetings frequency are proved to have a significant relation to
earnings management behavior.
Corporate governance has also been examined in relation with voluntary disclosures,
the other topic of this paper, but there is a lack of research about the connection of all of the
three topics: Corporate governance, Earnings management and Voluntary disclosures. In this
research, our approach will be the connection among this topics and how they interact. If, for
example, board size is associated with more voluntary disclosure, is it also associated and
with higher earnings quality?
In respect to voluntary disclosures, the extent and quality of voluntary disclosures
depend on the management’s discretional power to reveal to the stakeholders additional
information regarding the company’s performance. In order to examine the determinants and
incentives for corporate voluntary disclosures we will focus on corporate governance
characteristics that could affect the behavior of management regarding voluntary disclosure.

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 According to Heally and Palepu (2001) which performed a detailed review on the
literature for voluntary disclosures, the study of voluntary disclosures can be viewed by
different perspectives. One of them is the economic and behavioral determinants of
manager’s disclosures decisions which can be driven by the following: i) obligations arising
from specific contracts (contracting), ii) management’s effort to mitigate information
asymmetry in the capital markets, iii) political and regulatory requirements (accounting
standards and litigation), iv) corporate governance policies such as stock based
compensation schemes and board structure, v) management’s incentive to signal the market
for their managerial ability (signaling) vi) management’s concern to protect valuable
corporate secrets from revealing information related competitive advantages (proprietary
cost).
The theoretical link between corporate governance structures and voluntary
disclosures from management perspective can be viewed through all of the abovementioned
aspects but mostly through the fourth one. The optimal contracting theory that introduced by
Bebchuck and Fried (2003) suggests that “executive’s compensation schemes are special
contracts created for providing managers with incentives so as to work in alignment with
owners’ expectations”. According to Heally and Palepu (2001) these managers have
incentives to optimize the benefits coming from these contracts. One way to achieve this is
to disclose private information that could affect either the liquidity of the stock price or to
correct misleading information affecting stock’s value.
The management’s incentive for voluntary disclosure can also be seen through the
agency problem. Jensen and Meckling (1976) argued that the agency theory provides a basis
for a linkage between disclosure practices and corporate governance. According to them “an
agency problem occurs when shareholders assign decision-making authority to managers”.
Self-serving managers have an incentive to misappropriate the power given to them in order
to obtain or maintain their private benefits of control, (Grossman and Hart 1980). Through
voluntary disclosures managers provide the owners and shareholders with additional
information that enables them to have a better monitoring on management’s decisions
resulting in the reduction of agency costs and information asymmetry between managers and
owners.
Finally according to Verrecchia (2001) there are three broad categories of disclosure
research in accounting. The “association-based” category which concerns the effect of
disclosures on capital market and on individuals investing decisions, the “discretionary-
based disclosure” which examines managers’ decision-making on the nature, timing and
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extent of the disclosures they made and the “efficiency-based disclosure” which discusses
“which disclosure arrangements are preferred in the absence of prior knowledge of the
information”. In this study we will elaborate on the discretionary-based approach and
examine how corporate governance mechanisms can influence the discretion that managers
apply when disclosing additional information and which mechanisms of corporate
governance are the ones that could enhance voluntary disclosures.

3. Earnings management, voluntary disclosures and corporate

governance: Literature review

The association between corporate governance, earnings management and voluntary

disclosures has been the research topic of many studies so far, although they have focused
on a limited number of corporate characteristics.
Previous literature has proven the close relation between earnings management and
several corporate governance aspects. Some of the studies (i.e. Iyengar et al (2010), Iqbal et
al (2010), Hutchinson et al (2008)), trying to investigate this relation, use some
characteristics to classify a firm’s corporate governance as good or bad, and upon this base
to check the relation with earnings management. On the other hand, some other researchers
investigate thoroughly some specific characteristics of corporate governance and their
impact on earnings quality and earnings management. Following, we will present the
implications of the existing literature regarding of each corporate governance characteristic
and its relation to the earnings management.
The most thoroughly investigated characteristic is the degree of board independence.
Ahmad and Mansor (2009) in their research about Kuala Lumpur Stock Exchange (KLSE)
found that the existence of independent, non-executive directors on the board is a parameter
that hinders the management from committing income smoothing practises, a common way
of earnings management. Consistent with this finding is the research of Hutchinson et al
(2008) who investigated the Australian market of 2000 to 2005 and found that as Board
Independence and Audit Committees measures increase the level of Earnings Management
declines, implying by this a negative significant relation among these concepts. Moreover,
according to Agnes et al (2010), board independence, directors that are related with parent
companies and Duality in chairmanship and CEO are negatively related to transfer pricing
manipulations which is considered as a proxy for earnings management. Another important

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research comes from Beasley who divides their sample in no-fraud and fraud firms,
depending on their publicly known incidences, and found that no-fraud firms had boards
with significantly higher percentage of outside directors than fraud firms had. Finally, the
same result finds and Krishnan (2005) who concludes that both Audit Committee
Independence and the possibility of Audit Committee members having Financial Expertise
is negatively related to internal control problems.
On the other hand, there are researches that find no relation, or even a positive
relation, between different forms of earnings management and board independence. In
particular, Raghavan J. Iyengar et al (2010) in their research on 3,551 firm-year observations
from pre-SOX period in the US and Agrawal and Chadha (2005) in their research on US
companies from 2000 to 2001 find no significant relation between board independence and
earnings management behavior. Moreover, Chi-Yih Yang et al find a positive relation in
their research on Chinese firms. However, in this case, according to the authors, the
involvement of the Chinese government as shareholder alters fundamentally the terms of
corporate governance and may explain this weird result.
Concluding on this characteristic, what we expect to find through our research, is a
negative relation between the board independence as it is represented through the percentage
of independent directors on the total number of board. This means that as this percentage
will be increasing, the earnings manipulation behavior from the firm's management will be
decreasing probably due to the control effect of independent directors, who have limited
private benefits to expropriate from the company and so less incentives to proceed or allow
earnings management.
Another characteristic that is thoroughly investigated is the ownership structure in
terms of Block holder Ownership, Managerial ownership, Executives shareholdings, relation
with Founding Family, Board ownership and institutional investors.
Joseph P.H. Fan and T.J. Wong (2002) on their research on East Asia find that
controlling owners are taking advantage of accounting information for their own benefit and
exactly because of this fact outsiders cannot, and should not, rely on reports with limited
credibility and information value. According to them, earnings informativeness is limited
when concentrated ownership is applied. This implies that in firms that few shareholders
control the vast majority of shares, it is more possible to find evidences of earnings
management. In addition, according to other researches (Smith (1976), Dhaliwal et al
(1982), LaFond and Roychowdhury (2008)) there are evidences that major shareholders, in

7
order to expropriate private benefits in expense of minority shareholders are prone to
manipulate the accounting numbers.
Hutchinson et al (2008), on the their research, on 200 firms listed on the Australian
Stock Exchange (ASX) for the financial years ending in 2000 and 2005, found positive
significant relation between Earnings Management and increasing executive shareholdings.
This seems to be consistent with the previous research from the perspective of management
expropriation. That is executive shareholders, as directly involved in the management of the
company, are able to choose the accounting methods that along with the firm’s interests will
serve and their own interests. Moreover, according to Jiang and Anandarajan (2009), and
their research for the years 1998 to 2002, there is a strong positive relation between stronger
shareholder rights and higher earnings quality. Shareholders rights are considered as the
opposite of management control so the higher earnings quality implies that the management
in this situation is incapable of manipulating accounting numbers in expense of the
shareholders.
Very important is also the role of institutional investors. Previous researches have
shown that strong institutional ownership is in line with higher earnings quality. Marcia
Millon Cornett et al (2008) show that there is a strong negative relation between earnings
management from the managers, through the use of discretionary accruals, and monitoring
from sources like institutional shareholders existence, participation of them in the board and
independent directors. However, Jiang and Anandarajan (2009) distinguish the case that the
institutional investor has a short-term interest in the company. In that case, the monitoring
function is declining significantly.
On the other hand, there is an extensive research from Larcker (Larcker (2008)), who
finds no real proofs for relation between ownership structure and accounting manipulations.
These results of this and the previous research mean that there is still a great field for studies
in this topic.
Related to the concept of the ownership is also the bonding to the founding family. In
this concept, in the literature are distinguished two broad categories: companies that the
management still belongs to the founding family and companies that have gone public and
are controlled by a management team that has been appointed by the shareholders through a
voting procedure. According to Wang (2006): “on average, founding family ownership is
associated with higher earnings quality. Also, there is consistent evidence that founding
family ownership is associated with lower abnormal accruals, greater earnings

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informativeness, and less persistence of transitory loss components in earnings. Finally,
there is no linear relation between family ownership and earnings quality.”
The last topic that has been investigated from the existing literature, and that we are
also going to investigate is the firm’s ratio of leverage. Shen and Chih (2007) find a very
interesting result: “Ratio of leverage seems to be controversial: as ratio increases the
incentives for earnings management seem to increase up until a certain point. In that point,
creditors probably start to control more intensively the firm and this way the earnings
management incidents decline.”
Regarding corporate governance and voluntary disclosures, the most commonly
investigated corporate governance attribute in these studies is ownership in all different
aspects (managerial, block holder and institutional). Young et al (2009), used the Standard
and Poor’s (S&P) Disclosure Survey data for 460 companies for year 2000 and found that
firms with low levels of managerial ownership (which is less than 5 per cent of ownership)
show a negative relation between the level of managerial ownership and the level of
discretionary disclosure. Eng and Mak (2003) also concluded that lower managerial
ownership and significant government ownership are related with higher disclosure for the
firms listed in the Stock Exchange of Singapore in 1995. Moreover they found that block-
holder ownership has no effect on voluntary disclosure.
Eng and Mak’s (2003) results are consistent with Lakhal (2005) who found that large
shareholders interests of French companies do not depend on minority shareholders interests
so they retain the information they posses and do not affect the extent of voluntary
disclosures. On the other hand Lakhal (2005) found that the presence of foreign institutional
investors affects positively voluntary disclosures since they are interpreted as a good
minority protection to the market. Bushee and Noe (2000) support these results by finding
that firms who achieve higher AIMR (Association for Investment and Management
Research) disclosure rankings have greater institutional ownership. Last but not least high
family shareholdings as another aspect of ownership, is reported to have positive effect on
disclosures level when it is more than 25 per cent (Gray and Ghau 2010). Similarly, Shun
and Ho (2001) in their questionnaire study of 610 CFOs of listed firms in Hong-Kong
concluded that the percentage of family members’ participation on boards is the most
significant corporate governance variable.
The effect of independent and non-executive directors has also been adequately
studied. Laksmana (2008) developed a sample of 450 companies from S&P 500 for the
years 1993 and 2002 and found that boards acting independently of top management tend to
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make more disclosures. Moreover Jianguo and Huafang (2007) found that, for 559 firms
listed on the SSE in China in 2002, an increase in the percentage of independent directors is
related to an improved level of voluntary disclosure. In the corporate governance literature
the existence of independent directors is strongly related to increased firm performance and
consequently to minority shareholders wealth (Hermalin and Weisbach 2003). The findings
in voluntary disclosures literature could imply that independent directors use voluntary
disclosures as a means of enhancing the quality of shareholders information.
On the other hand, Gul and Leung (2004) after compiling a disclosure list of 44
discretionary items based on the Hong Kong Accounting Standards, found that firms with a
higher percentage of ENED ( independent and experienced executives) tend to provide less
voluntary disclosures. According to them, “this result is consistent with the substitution
relationship between expert outside directors and voluntary disclosure in monitoring
manager”.
As far as non-executive directors are concerned, both Horwitz and Leung (2004) and
Chen and Jaggi (2000) reported in their results that the proportion of non-executive directors
enhances voluntary disclosures and could improve firm’s compliance with disclosure
requirements. What is more, Young et al (2009) specifically found that firms where outside
directors have a higher percentage of representation on the board are more likely to disclose
corporate information related to board and management.
Stock option compensation schemes and long-term incentives plans for CEO and
executives have been strongly and positively related to firm performance as they are
considered to align managers and shareholders’ interests (Mason 1971 and Leonard 1990).
Voluntary disclosures are also examined in association with executives’ stock option plans.
Lakhal (2005) in his research for listed French companies for 1998-2001, resulted that
French managers are more likely to disclose non mandatory information regarding earnings
when they are compensated with stock option schemes. Nagar, Nanda and Wysocki (2003)
included in their model, stock based compensation plans for managers and concluded that
there is a positive long-run relationship between disclosure and managerial wealth tied to
share price.
Duality of CEO is also examined in the context of voluntary disclosures and corporate
governance. Lakhal (2005) resulted that managers in France are less likely to involve in
voluntary earnings disclosures when there is duality in the leadership structure. Gul and
Leung (2004) also found that CEO duality is related to a lower level of voluntary
disclosures, enhancing the importance of segregation for the positions of chairman and CEO.
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 An interesting approach is that of Bilson et al. (2006) who constructed a unified
variable in order to combine the variables of ownership and competition (OC) and examined
their relation to voluntary disclosures. The percentage of shares held by the top 20
shareholders was used to proxy for ownership, and the level of competition was measured as
1 minus the Herfindahl index for industry concentration (a widely used index in research
including the U.S Department of Justice). After testing for each variable alone, they
concluded that voluntary disclosure and the interaction variable OC are not only positively
related but also more highly significant than each of the competition and ownership
variables alone.
The impact of certain corporate governance characteristics, such as board composition,
CEO compensation and takeover defences on reporting practices including analyst’s
consensus and uncertainty was examined by Mark and Shortrigde (2010). They employed
analyst’s earnings forecast for 1,150 firms and tried to measure how analysts’ predictions are
affected by the existence of the abovementioned corporate governance mechanisms. They
concluded that the level of corporate governance best practices implemented is indifferently
related to analysts' consensus and the uncertainty of their predictions in not related to the
corporate governance score. Their results also suggested that the precision of analyst
forecasts is not affected by the different corporate governance structures and that a
connection between corporate governance quality and the analysts’ forecast behaviour
cannot be established with certainty.
Magnan et al. (2010) measured the impact of corporate governance on information
asymmetry between management and investors in a sample of 131 Canadian firms that
represented 44 per cent of total capitalization in spring 2005. They specifically focus on
disclosures about board’s and management’s processes and they distinguish two aspects of
corporate governance; the required monitoring role which is achieved through mandatory
reporting and the discretionary role of voluntary disclosures. Their findings suggest that
some formal control mechanisms such as board and audit committee size as well as the
extent of voluntary governance disclosure result in reduced information asymmetry.
The effect of Audit Committee as an effective corporate monitoring instrument which
enhances voluntary disclosures was studied by Shun and Ho (2001) who reported it as their
second most significant variable after the percentage of family members on the board.
Board size has been extensively investigated for its impact on the quality of corporate
governance by many studies in corporate governance. Yermack (1995) concluded in his
research that the size of the board is inversely associated with firm performance. On the
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other hand, Laksmana (2008) measured whether some corporate governance characteristics,
such as board and compensation committee size are related to the extent of compensation-
related disclosures. He suggested that the time and resource that directors devote to perform
their monitoring and control tasks is positively related with the compensation related-
disclosure. His results also indicated that the higher the board meeting frequency and the
board size are, the more transparent disclosure practices the board follows.
This study aims to further investigate the relation between earnings management,
voluntary disclosures and some others corporate governance characteristics such as the
existence of a busy board, the size of the board and the existence of unequal voting rights.
Finally, we will try to introduce some new variables that we think would be very
interesting for the public as they refer to widely known information. First, we will test if the
existence and the activity of a CEO’s profile in the LinkedIn and Twitter has an effect on
earnings management and voluntary disclosures. We are investigating this variable based on
the assumption that a “social” CEO may have not something to hide and will be positively
related to voluntary disclosures and negatively related to earnings manipulation. Second, the
CEO’s age and tenure may be positively associated with earnings management and
negatively to voluntary disclosures as CEOs are more capable to manipulate accounting
numbers in expense of the other stakeholders.
To conclude we would like to array the opinion of David F. Larcker (Larcker (2008))
that “the results of governance measures have a very modest level of reliability and construct
validity”. This becomes more obvious if we take into account the level of adjusted R square
that in most of the cases does not exceed the 10 percent, and that means that the rest 90
percent of the dependent variable cannot be explained by the independent variables.
However, even with these levels, regression results usually give some implications of the
real situations.

4. Analysis of new variables

Social Exposure (SCE)

In this section we provide an analysis of the new variables introduced in our model
and their contribution in research.
To begin with, the most innovating variable is whether the CEO and the company
have a personal account in LinkedIn and/or Twitter network. LinkedIn is a social network
that is business oriented and provides its members with the ability to present their
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professional skills and working experience through their profile and at the same time
connects them to other professionals and companies that are members of the network.
Twitter is a social network of general interest that everybody can be part of it and is also
used by professional and companies as means of making announcements and
communicating news.
Social networks such as Facebook, Twitter, LinkedIn and MySpace are very popular
and have well-expanded in the business world as well. Not only employees but also
companies have their own profiles in these networks as a means to promote their products,
attract customers, communicate their policy and even make important announcement or
press releases.
We decided to incorporate in our study, LinkedIn and Twitter as we consider them
more related to the business field and our study. In contrast to LinkedIn and Twitter,
Facebook and MySpace are thought to be more personal and usually include more private
information and interests thus we decided to exclude them from our research. The new
variable of social networking in LinkedIn and Facebook is referred from now on our paper
as social exposure and describes the company’s engagement in these networks.
Our aim is to test for the association between the company’s social exposure practices
and its appetite for voluntary disclosures. We believe that if the firm or the CEO has an
account and are active members of these networks, they allow and desire public to have
more access in their practices, policies and beliefs. Consequently we assume that they would
have a greater proclivity to disclose additional information and provide more voluntary
disclosures.
Somebody could argue that companies engage in social networking for advertising
reasons as a way to promote their products and services. This is true; however recent
practices clearly indicate that the use of social networking tools such as, Twitter LinkedIn
and Facebook ranges from promotion activities to on-line discussions with investors and
"inside looks" at company events. According to MacDermott Will & Emery (2009) “Twitter
is a productive use of executive time or will become a vital and lasting part of a company’s
general corporate communications or investor relations practices”.
Our hypothesis that companies and executives who engage themselves in social
exposure are more likely to provide voluntary disclosures could be also supported by the
management talent signaling hypothesis introduced by Trueman (1986). Trueman supports
that managers have an incentive to provide additional disclosures in order to give a good
impression to the market that they perform effectively and have the ability to improve firm
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value. By providing more disclosures in the form of statements on their status or giving brief
information on the company’s future results before the official announcement of numbers,
executives might want to signal the labor market with their good forecasting skills.
The relation between social exposure and earnings management rises from the belief
that earnings management is something that companies, and especially CEOs, do it “in the
background”. On the other hand, the greater exposure of CEO in social networks implies an
appetite to share information with outsiders. Because of the fact that these two things are
controversial, the two concepts normally should have a negative relation. A CEO that is
involved in earnings management is expected to try to provide as less as possible
information to the outsiders. The more the outsiders are aware of the easier would be for
them to identify earnings manipulation tactics.
However, earnings manipulation is related to financial information and not to
information included to LinkedIn and Twitter networks and this is a limitation of the
research. Nevertheless, we will examine this variable because we think that they are both
related to the CEO’s personal character. A CEO who is eager to commit in earnings
management is unlikely to be equally eager to provide more information in general,
including also personal information.

CEO’s age (CAG)

For the connection between CEO age (CAG) and the extent of voluntary disclosures
there is little to no evidence in prior literature. There are studies however relating CEO age
with firm performance. These studies imply that the greater the age of CEO, the more
experienced and skilled he is, thus he enhances firm performance with his decision-making
(Acemoglu et al., 2006). On the other hand other studies suggest that older CEOs are more
risk averse, less innovative and they do not contribute to firm performance due to inertia
(Miller et al. 2001).
Considering the abovementioned findings as the most relevant to our research topic
and taking into account the contrasting effects of ageing, we form the hypothesis that the
older the CEO the less likely he is to make additional disclosures. We base this assumption
on the common notion that the older the CEO is the more successful and acknowledged he is
in his working environment and therefore is not willing and does have to employ voluntary
disclosures in order to positively signal the market about his performance. Based on the
same reasoning we anticipate the same negative effect between the extent of voluntary
disclosures and the CEO tenure in the company.

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 Regarding earnings management, CEO’s age is related to his/her experience and
expectations not only as a CEO but as professional in general. A CEO younger in age is
more likely to be driven by his ambitions and therefore is more prone in trying to show as
better as possible results. This desire could be an incentive to commit earnings management.
Someone could argue however that, a CEO who is in the beginning of his/her career
wouldn’t risk spoiling his (her) reputation and because of that would be more reluctant to
commit earnings management.
Moreover, a CEO that approaches his (her) retirement age has to contradictory
incentives: On the one hand, to protect his (her) reputation that has built over the past years,
and on the other hand, to take a good severance pay. We should not forget that earnings
management is not only employed to commit fraud but it can be also used to hide a
committed fraud.
What is more, a young CEO may not have the experience and does not know the way
to commit earnings management. In contrast an older and more experienced CEO is
expected to have all the means and the “know how” in order to be involved in earnings
management.
Considering all these thoughts and arguments we expect that the older the CEO the
more likely he is to engage in earnings management.

Unequal Voting Rights (UVR)

Regarding unequal voting rights, a variable that is examined for the first time in this
concept, we make the assumption that the existence of unequal voting rights in the corporate
structure restricts the extent of voluntary disclosures made by the executives.
To start with, we provide the following definition of voting rights; “The right of a
common stock shareholder to vote, in person or by proxy, for members of the board of directors
and other matters of corporate policy, such as the issuance of senior securities, stock splits and
substantial changes in operations”. These rights become unequal when all the shares issued by
the company do not bear the same voting rights. In other words, this means that the possession
of one share does not automatically entail the right of one vote in the annual general meeting of
the company but could be either carry no voting right or more than one voting rights. This kind
of provisions limits the voting rights of some shareholders and expands those of others and these
considers unfair for investors.
According to Grossman and Hart (1988) “investors may be better protected when dividend
rights are tightly linked to voting rights, that is when companies in a country are subject to one-
share-one vote rules” which is the opposite of unequal voting rights.
15
 Because the existence of unequal voting rights is considered an indicator of poor corporate
governance, and usually this kind of structures provides management with voting power
disproportionately greater than by the existence of one-share one-vote resulting in management
entrenchment (Jarrell et al 1988) we assume that management will be less willing in providing
non mandatory disclosures.
In relation to earnings management we examine unequal voting rights as a proxy for
CEO’s level of ”freedom”. In a company that unequal voting rights dominate, the CEO and
executives in general are expected to have more freedom to defend his own private benefits in
expense of the minority shareholders. Also, the level of monitoring is restricted and in case of
dissatisfaction from the minority shareholders it is more difficult for them to react.
As a result, the expected effect in this case would be positive. However, because of the
fact that it is just a proxy for CEO’s level of freedom and it does not illustrate the real situation,
the significance is not expected to be high.

CEO Tenure (YWR):

The reasons for examining this variable are more or less the same with the previous
variable’s reasons. The determinant in this case is that we approach CEO’s working
experience specifically within the company. A recently appointed CEO has more or less the
same incentives and experience as a young careerist as it was described previously. The
same holds for a CEO with many years in his position in comparison with an older CEO.

Stock Exchange (SEX):

Through this variable, we will check for any differences among different markets. This
is not exactly a Corporate Governance variable but it’s something that we find interesting to
examine for.

Busy Board (BB):

The concept of the relation of Busy Boards to earnings management rises from the fact
that there are evidences that busy boards are not effective monitors on the management
function (E.M. Fich, A. Shivdasani (2006)). This could lead to increased incentives for
management to manipulate company’s earnings in order to maintain and its private benefits
of control.
So, the expected relation of this variable to Earnings Management is a positive one. As
the level of busy boards increases, the level of earnings management will also increase. On
the contrary we expect that a busy board will not devote a lot of its time and resources to

16
provide voluntary disclosures other than the mandatory ones. Consequently we anticipate a
negative effect between this variable and voluntary disclosures.

In Table 1 below we give in brief our expectations for the variables that we introduce.

Table 1

Expected sign on:

Variable Earnings Management Voluntary Disclosures

Social
- +
Exposure (SCE)
CEO age
+ -
(CAG)
CEO
Tenure + -
(TEN)
Busy
+ -
Board (BB)
Unequal
Voting Rights + -
(UVR)

5. Hypothesis development and research design

Research method
As already mentioned, according to a great number of researches, earnings
management and voluntary disclosures seems to be highly related to the firm’s corporate
governance. What has not been tested in the literature so far is a contemporaneous research
upon the two topics. We consider as granted the interaction among the three dimensions in
the firm’s function and try to find the Corporate Governance characteristics that affect
simultaneously and with the same way earnings management and voluntary disclosure
behavior.
So, our expectations form the first hypothesis:

17
 H1 = Do Corporate Governance characteristics affect Earnings management behavior?

After that, we will investigate a second hypothesis that will check whether or not those
characteristics affect voluntary disclosures’ behavior to the same direction. The second
hypothesis is the following:

H2 = Do Corporate Governance characteristics affect Voluntary disclosures behavior?

Based on our results we will check whether or not the results are consistent with the
literature discussed. To do so, we have divided the total sum of variables in three subsets: i)
already investigated variables – Board Independence (INB), Board ownership (BOW),
Institutional Investors (II), ii) new variables that have not been investigated and try to
estimate their impact – the CEO’s exposure to social networks such as LinkedIn and Twitter
(SCE), CEO age (CAG), CEO Tenure (TEN), Stock Exchange (SEX), Busy Board (BB),
Unequal Voting Rights (UVR), Board Size (BS), iii) control variables – Industry Dummies
(IND), Firm Size (FS), Leverage Ratio (VEV).

Measurement of Earnings Management

In order to investigate the relation between corporate governance and earnings

management on one hand and voluntary disclosures on the other hand, we will run two
different regressions: With the first one will try to find which one of the Corporate
Governance characteristic is affecting the “earnings management behavior” and with the
second one will try to find the same for Corporate Governance characteristics in relation to
“voluntary disclosures”.
The two models will be the followings:

EM = α0 + β1INB + β2BOW + β3II + β4SCE + β5CAG + β6TEN + β7SEX + β8BB +

β9UVR + β10BS + β11IND + β12FS + β13VEV + ε

VC = α0 + β1INB + β2BOW + β3II + β4SCE + β5CAG + β6TEN + β7SEX + β8BB +

β9UVR + β10BS + β11IND + β12FS + β13VEV + ε

To measure earnings management, we use the modified Jones model which is

considered to be the most trustworthy (Dechow et al (1995)) and takes into account cases
that management manipulates earnings through discretionary revenues. In this measure, non-

18
discretionary accruals are calculated for the period that is believed earnings management to
have taken place as:

NDAt = α1(1/At-1) + α2(ΔREVt - ΔRECt) + α3(PPTt)

Where:

ΔREVt = Revenues in year t less revenues in year t-1 scaled by total assets at t-1.
ΔRECt = Net receivables in year t less net receivables in year t-1 scaled by total assets
at t-1.
At-1 = Total assets at t-1
α1, α2, α3 = Firm specific characteristics which are calculated by the following formula:

TAt = a1(1/At-1) + a2(ΔREVt) + a3(PPTt)

where a1, a2, a3 imply the OLS estimates of α1, α2, α3 and TA are total accruals scaled
by lagged assets (Dechow et al (1995)).

Measurement of Voluntary Disclosure

Disclosure quality will be measured using Botosan’s (1997) self-constructed index

based on the information provided by the annual reports of the companies. Botosan claims
that “it should serve as a good proxy for the level of voluntary disclosure provided by a firm
across all disclosure because it is generally considered to be one of the most important
sources of corporate information”. Moreover, Knutson (1992) states that “At the top of
every analyst's list (of financial reports used by analysts) is the annual report to shareholders.
It is the major reporting document and every other financial report is in some respect
subsidiary or supplementary to it”. The index consists of five categories of voluntary
information identified by investors and financial analysts: background information,
summary of historical results, key non-financial statistics, projected information and
management discussion and analysis.
In order to estimate the contribution of each variable we will try to run the regression
in “phases”. By this, we mean that first we will include the control variables and the
variables that are already examined in prior literature and then we will add one by one the
new variables in order to see how they affect the adjusted R-square and their contribution to
the explanatory power of our model.

19
 Measurement of Independent Variables

In this section we provide an overview of how we plan measuring the new

independent variables that we introduced. For the rest of the independent variables we do
not provide a way of measurement because they have been extensively examined by prior
literature.
Most of our variables (like CEO’s age and Board Size) are easy to be defined because
of their nature. Some others like social exposure are more complicated and have to be
clearly defined in terms of their structure in order to interpret the results. An important fact
is that we use a series of years in our sample and this could affect the reliability of the
measurement (i.e. the CEO’s age is different for every year or is taken the first year only?).
In this section we will explain how exactly we will measure each Corporate Governance
variable. This is very important because a different measurement of the same characteristic
may produce different and even controversial results.

Social Exposure (SCE):

This is maybe the most interesting variable because of the fact that has never been
examined before and that there are many different ways to be measured. An important
decision is what networks and sub-measures should be included. Opinions vary in the base
of the network and the weight of individual elements. One choice would be to use them as a
dummy variable based on whether or not CEO has a profile on a social network. However,
this would not distinguish among profiles with many or few connections and much or less
information provided through them. So because of the lack of previous literature on this
specific topic, we decided to introduce our own model. This will take in account two social
networks: LinkedIn and Tweeter and also will treat differently the profiles based on how
active the profile is. Different weights will be used for each element to create a score for the
variable. The model is illustrated on the following formula:

SCE = (LinkedIn + LinkedIn Connections/100 + Group) x

2 + (Twitter + Twitter followers/200 + Group)

By the element “LinkedIn” we mean the existence or not of a CEO’s profile with
values of “1” if there is such an account and “0” otherwise. Then we count the connections
and divide them by 100. The main idea is to give 1 additional point in total score for every
100 connections. Finally, one more point will be credited for the existence of an official

20
company’s group. We do the same, more or less, with the Twitter accounts. The main
difference is that in this case we count for followers and then divide by 200. Obviously, we
give higher weight to LinkedIn network for two reasons: First, we consider it to be closely
related to the business functions and the business world in general. Second, we divide the
Twitter followers by 200 because in average is usual for a Twitter user to have more
followers than a LinkedIn user has connections and also a Twitter user may have followers
without his/her approval.
In the end a score will be structured for each company that will be used in the
regression model. This score may vary from “0”, even if we don’t expect that there will be
companies with no group account in either of two networks, to 20 or even 30 with not a
specific upper limit.
A limitation directly related with this variable is the non-existence of LnkedIn and
Twiter all the years of the period that we examine. But even for the years that these networks
did exist we cannot retrieve information for a specific moment in the past. So we ended up
with the use of the present information as a proxy for the CEO’s appetite for social
exposure. But, still, as the appetite for social exposure is an aspect of the CEO’s character
we don’t expect it to change significantly over time. As a conclusion we would say that if a
CEO is social in the present time he would probably be social even in 2002, 2003 and so on.

CEO’s age (CAG):

To define this variable we will use the BoardEx database that provides instant
information on CEO’s age. A problem that rises from this variable is in the case of a CEO
turnover during the fiscal year. In this case we will accept as the year of CEO the one that is
expected to have prepared the financial statements. So, if the new CEO took over less than
one month before the end of the fiscal year, the previous CEO’s age will be counted as the
value of the variable for that year. Otherwise, the new CEO will be considered to have
prepared the financial statements.

CEO Tenure (TEN):

In this variable we will use the same method with the previous one, CEO’s age.
Depending on the moment of the turnover, if such a thing happened, we will measure the
value of the variable.

Stock Exchange (SEX):

21
 This information is directly provided from the Database so we don’t expect to have
any problems or specific situations to deal with.

Busy Board (BB):

In previous literature (i.e. E.M. Fich, A. Shivdasani (2006)) Busy Boards are usually
defined as dummy variables with values of “1” in case that the majority of the directors sits
on three or more boards and “0” otherwise. We will try to approach this thing in a different
way by structuring our own model.
Through the RiskMetrics Database, we will also count the number of directors that sits
in 3 or more other boards but we will divide that number with the total number of directors,
finding in this way a proportion that is going to be the variable’s value for the observation.

Unequal Voting Rights (UVR):

Regarding this characteristic, we are going to get values through the RiscMetrics
Database and is going to be a dummy variable with values of “0” if the company has not
implemented unequal voting rights in the Voting Provisions and “1” if it has.

Sample Selection

For the purpose of our research, our sample will be consisted of the S&P 500
companies, as they were listed on August 30, 2010.
The period that we are going to collect data for will be 2002 to 2006. The reason for
that is that we want to avoid deviations caused by introduction of the SOX legislation in
2002 and the financial crisis of 2007-2009. S&P’s companies are incorporated in the US and
it is generally accepted that US companies suffered the greatest impact from both events.
Also, from our sample we will exclude financial companies because of three reasons:
First there are special regulation and accounting principles for financial institutions that are
different from that of other companies. Second, banks accepted financial help from the
government, and that may have significant impact on earnings management and disorientate
the sample. Third, they may have different incentives for earnings management (Jiang et al
(2009)).
So, we will create a data set consisted of 419 companies through 5 years – that means
2095 firm-years observations. From this dataset we will also exclude firm years that some of
that data are missing and we hope to end up with more than 200 companies that we consider
as a sufficiently large sample.

22
 Attainability

The Databases we will collect data from are:

 RiskMetrics (Governance legacy): for data about Unequal voting rights,
 RiskMetrics (Directors legacy): for data about directors characteristics,
 BoardEx: for data about directors characteristics,
 Compustat: for accounting information,
 LinkedIn: to check about the existence of CEO profiles and their completeness
and connections to other peers
 Twitter: to check about the existence of CEO profiles and their completeness and
connections to other peers.
All of the abovementioned databases are accessible through the university’s network.
LinkedIn and Twitter profiles can be checked on-line and the only not significant risk is the
synonymy between the directors.

Limitations

We chose S&P 500 companies for a number of reasons:

i.They represent the world’s greatest company that represent the economy in total and
that makes them the most interesting sample for research.
ii.There are widely available data for that companies through several databases in which
access is available.
iii.They are important for a large number of investors that may be interested in the results
of the research.
iv.They represent all the industries of the economy.
On the other hand, our sample selection implies some limitations:
i.S&P companies are considered to be the biggest companies in the world and are
predictable to have the best Corporate Governance. This may decrease the deviations in
terms of Corporate Governance characteristics and affect negatively the quality of the
results.
ii.S&P companies are incorporated in the US and so they represent the situation only in
the US.

23
 iii.The fact that they are listed in the New York Stock Exchange and NASDAQ, the two
largest American stock exchanges with approximately the same strict rules about corporate
governance and financial reporting.
These limitations comprise also the limitations of the research as the deviations won’t
be very strong and will mainly depict the situation in the US.
Except from the abovementioned limitations, there are also some others that rise from
the very nature of this research. Before we further explain them, we have to make a brief
summary of the most common problems in regression models that you have to check for
after the research.
A very common problem, and not easily identifiable, is spurious regression. This
happen when it seems that there is a causal connection between two variables – one of the
independent variables and the dependent variable – but in fact they are both related to a third
one and not one to each other. In other words, behind an apparent relation between the “A”
and the “B” variable may be hidden three possible explanations:
 A causes B,
 B causes A,
OR!!!
 C causes both A and B,
 Or even more, A causes C, C causes D, D causes B.
This is something that is possible to happen to every research. However, in our
research is even more probable to happen because of the fact that we involve 3 factors in our
research: Corporate Governance (A), Earnings Management (B) and Voluntary Disclosures
(C). So, in our case a probable positive relation between A and C may exist in fact because a
positive A to C relation and an also positive relation between C and A, or even a negative
relation between A and C and an also negative relation between C and A.
Nevertheless, because of the fact that we ran separate regressions to check the relation
between Corporate Governance and Earnings Management and Corporate Governance and
Voluntary Disclosures, we hope that we will identify that kind of a problem. However, still
remains the possibility of a not included “X” variable that affects both the variables and
biases the results. This possibility exists in every regression model and the problem is not
easy to be identified.
Our research subject is very difficult to be examined even in a two concepts
framework (either Corporate Governance – Earnings Management or Corporate Governance

24
– Voluntary Disclosures). So our combination makes it even more difficult as adds the term
of comparison.
Because of the fact that we are examining two different things, it will make no sense
to compare the coefficients. In a regression analysis, along with the t-stats it is also very
important to examine the coefficients. The higher the absolute value is, the higher the impact
the variable has on the dependent variable. But, because of the fact that on our regression
models the dependent variables are different a comparison is not applicable.
So, what we are going to do is just to check the significance of each variable. If an
individual variable come up to be significant in one of our models, we will check also for the
other model. But we can’t do nothing more than that or to interpret the coefficient. And
that’s a limitation of our research.

6. Conclusion
In this research design we aim to investigate the association between corporate
governance, voluntary disclosures and earnings management. Our approach is based on the
introduction of new variables and their effect on earnings management and voluntary
disclosures. The new variables consist of CEO social exposure, CEO Age, CEO Tenure and
Unequal Voting Rights.
The effect of these variables is examined by regressing them against voluntary
disclosures which will be measured by a self constructed index based on Botosan (1997) and
earnings management will be proxied by the modified Jones model by measuring non
discretionary accruals. Our sample consists of the S&P 500 companies regarding the period
2002 to 2006. The period selection was made in order to avoid the effects of the introduction
of SOX and the financial crisis of 2007-2009.
In order to test for our hypotheses we designed two different regressions and we will
examine whether the same corporate governance variables, cause the same effect, meaning a
positive or negative relation, with both earnings management and voluntary disclosures.
The predictions for our results as mentioned in the Table 1 in Section III, regarding
CEO social exposure are a negative relation for earnings management and a positive for
voluntary disclosures. What is more, older CEOs are more likely to indulge in earnings
management, whereas we do not expect that they will provide more voluntary disclosures.
The same relation is anticipated between CEO tenure and earnings management and
voluntary disclosures.

25
 Our predictions indicate that the same corporate governance variables have an
opposite effect on earnings management and voluntary disclosures meaning that the
existence of a specific corporate characteristic might be beneficial for voluntary disclosure
but at the same time limits earnings management.
The results of our research could be of great interest to investors and should be taken
into account by companies in cases where legitimate earnings management is more desired
than voluntary disclosures; newly established companies want to present more favorable
results than provide additional disclosures. On the other hand, companies in the period prior
of an IPO are much more interested and are also required to present reliable and transparent
results together with extensive voluntary disclosures.
For the above mentioned reasons we believe that our research will provide all
interested parties such as investors, companies and regulators with a useful insight on the
factors that could affect the existence and extent of earnings management and voluntary
disclosures in a company and the interactions between them.

26
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Accounting Auditing & Taxation, start page 139.
Trueman B. 1986. “Why do managers voluntarily release earnings forecasts?”
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Vafeas N. (2005). “Audit Committees, Boards, and the Quality of Reported
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29
 Yang C-Y., Murinde V., Ding X. “Ownership Structure, Corporate Governance and
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30
 APPENDIX

Author(s) Object of Sample Methodology Outcome

#
Study
 Ryan Internal Cross-  Model used:  A majority of non-executive
Davidson governance structures sectional sample of DAC = α + β1BDIND1 + directors1 on the board and on the audit
 Jenny and earnings 434 listed β2INDCHAIR + β3AC + committee2 are found to be significantly
Goodwin - Stewart management Australian firms, β4ACIND2 +β5ACMEET + associated with a lower likelihood of
 Pamela Kent for the financial β6ACSIZE + β7IAF + β8BIG5 + earnings management, as measured by the
year ending in β9SUBSH +β10LEV + absolute level of discretionary accruals.
Published on: 2000. β11ABSCH + β12SIZE +  The voluntary establishment of an
1
Accounting and β13ABSNI +β14MKT + β15EXTP internal audit function and the choice of
Finance (2005) +ε auditor are not significantly related to a
 DAC = absolute value of reduction in the level of discretionary
discretionary accruals as accruals.
measured by the cross-sectional  Negative association between small
modified-Jones model. increases in earnings and the existence of an
audit committee.
 Ayoib Che Board 161 firms  Model used:  The existence of non-executive
Ahmad independence, listed in Bursa Smoothi = α + β1NEDi1 + directors1 and the presence of brand name
 Nooriha ownership structure, Malaysia Berhad β2DUALi + β3REMi + β4INSTi auditors2 are significant in hindering the
Mansor
2 audit quality and (previously known + β5OWNi + β6CCCi + β7AUDi2 management from indulging in IS.
income smoothing as Kuala Lumpur + β8INDi + β9PROPi + β10SIZEi
Published on: activities: A study on Stock Exchange + β11PROFITi + εI
Journal of Malaysian market (KLSE))  Income smoothing index

31
Modern Accounting = (CVI / CVS )
and Auditing (2009)

 Biao Xie Earnings 94 “S&P The methodology used for  Board and audit committee members
 Wallace N. management and 500” firms measuring decomposing with corporate or financial backgrounds are
Davidson III corporate (alphabetically accruals is based on Teoh et al associated with firms that have smaller
 Peter J. governance: the role selected) with 3 (1998a) and Jones (1991). As discretionary current accruals.
DaDalt of the board and the observations for this is only a summary of  Board and audit committee meeting
audit committee each one (years literature, details can be found frequency is also associated with reduced
3
Published on: 1992, 1994, and on source articles. levels of discretionary current accruals.
Journal of 1996) – totally: 282  Board and audit committee activity
Corporate Finance 9 observations. and their members’ financial sophistication
(2003) may be important factors in constraining the
propensity of managers to engage in
earnings management
 Ryan LaFond Earnings  21 sample  Model used:  Greater discretionary smoothing is
(Massachusetts Smoothing, countries with well- SMTHt = β0 + related to lower liquidity, lower trading
Institute of Governance and developed capital LNTOTASSt + LEVt + GMt + volume and higher bid-ask spreads.
4
Technology) markets
Liquidity: STD_SALESt + %LOSSt +  Greater innate smoothing is related
 Mark Lang International  Time OPCYCLEt + SGt + OPLEVt + to liquidity.
(University of North Evidence period: from 1994 DIVIDENDt + AVECFOt +

32
Carolina) to 2005 STD_RETt + RIGHTSt +  Regarding investors’ behavior, there
 Hollis A.  Sample TXBKCONFORMt + ADRt + is a differentiation between innate and
Skaife (University of size: not mentioned ANALYSTt + %CLHLDt discretionary and the last is the one that
Wisconsin) (2007)  Smoothing is divided deters investors.
into innate and discretionary
components.  Firms from Greece, Austria and
 Incentives for smoothing Italy seem to have the most smoothed
examined are increased: greater reports.
tax-book conformity,  Firms from Norway, Sweden and
concentrated ownership, related Canada seem to have the least smoothed
party transactions and weak reports.
overall governance, and
decreased: investor protection,
analyst following and ADR
listing.
 Raghavan J. Does board 3,551 firm-  Authors use a pooled  The findings show negative and
Iyengar governance improve year observations ordinary least squares regression statistically significant associations between
 Judy Land the quality of from pre-SOX to analyze the quality of reported earnings quality and the proportion
 Ernest M. accounting earnings? period. Companies reported earnings. of CEO incentive pay1 and firm’s growth
Zampelli were from the US opportunities2 (as measured by market-to-
5 and were not  To estimate abnormal book).
Published on: functioning in the accruals, they use the Ball and  It is also found that earnings quality
Accounting financial or non- Shivakumar model. is positively and significantly related to the
research journal utility sectors. existence of an orderly CEO transition
(2010)  MODQ = a0 + process3 (as measured by retirement policy).
a1INCPAY1 + a2MKBK2 +  However, board independence4 does
33
 a3PCTINTBD4 + a4RETPLY3 not seem to be associated with earnings
+ a5BDSIZE + a6MEETINGS + quality.
a7DUAL + a8MKVAL + a9FIN
+ a10OWN + a11LOCK + ε
 Abdullah Iqbal The effect of UK firms Authors calculate Manipulation of earnings around right
 Norman Strong corporate governance from London Stock discretionary accruals using the issues is strongly connected with higher
on earnings Exchange that m-Jones model and use as a debt to equity ratios, lower proportions of
Published on: management around issued rights over proxy for earnings management. non-executive directors and no large block
6
International UK rights issues the period “January owners.
Journal of 1991 to December
Managerial Finance 1995”
(2010)
 Marion R. An 200 firms  The distinguishing thing Negative significant relation of
Hutchinson investigation of the listed on the about this research is that Earnings Management with Board
 Majella Percy association between Australian Stock estimates the impact of independence and Audit committee.
 Leyal corporate Exchange Corporate Governance before
Erkurtoglu governance, earnings (ASX) for the and after the reforms of CLERP Positive significant relation between
management and the financial years 9 and ASX Corporate Earnings Management and increasing
7 Published on: effect of governance ending in 2000 and Governance Council (CGC). executive shareholdings.
Accounting reforms 2005.  Authors employ
Research Journal individual regressions to test
(2008) their 8, in total, hypotheses.
 Earnings management is
measured by the absolute value
of performance-adjusted current

34
 discretionary accruals
(PACDA).
 Agnes W.Y. Can corporate 266 The main idea that  Board independence, directors that
Lo governance deter companies listed on contributes to the literature is are related with parent companies and
 Raymond M.K. management from the Shanghai stock the comparison authors do the Duality in chairmanship and CEO are
Wong manipulating exchange that gross profit margins on related- negatively related to transfer pricing
 Michael Firth earnings? Evidence disclose gross party sales transactions and manipulations.
8 from related-party profit ratios on profit margins on sales to
Published on: sales transactions in related party external customers. If there is  Audit committees and the
Journal of China transactions any difference, consider it as an percentage of shares held by the largest
Corporate Finance evidence for earnings shareholder are not proved to have a
(2010) management. significant impact.

 Anup Agrawal Corporate 159 U.S. According to the authors, Inconsistent with other researches
 Sahiba Chadha Governance and public companies and the distinguishing results, the lack of relation between the
Accounting Scandals that restated their characteristic of this research is independence of boards, the audit
Published on: earnings in the the measurement of earnings committees and the provision of non-audit
Journal of Law years 2000 or 2001 management which is being services by outside auditors with evidences
and Economics and an industry size implemented through the on earnings management.
9
University of matched control existence or not of earnings re- On the other hand, evidences of
Chicago (2005) sample of 159 non- statements. This, is suppose to correlation were found:
restating firms. be the first and only research on  Lower, for director with financial
this specific field. expertise in the Audit Committee, and
 Higher, for CEO belonging to the
founding family.

35
  Chung-Hua Earnings 495  To create a better model,  Negative relation between good
Shen Management and companies in 25 3 earnings management Corporate Governance and Earnings
 Hsiang-Lin Corporate emerging countries measures were examined: Management
Chih Governance in Asia’s in April 2001 and earnings smoothing (2) and  Large firms are prone to implement
Emerging February earnings aggressiveness. A earnings management techniques.
Published on: Markets 2002. fourth measure was comprised  Ratio of leverage seems to be
The Authors as an average of the previous controversial: as ratio increases the
Journal three. incentives for earnings management seem
compilation (2007) to increase to until a certain point. In that
1
 The main contribution of point, creditors probably start to control
0
this research to the literature is more intensively the firm and this way the
that focus on emerging markets. earnings management incidents decline.
 Firms with higher growth are more
 Corporate Governance eager to conduct earnings management in
variables investigated are: forms of income smoothing and earnings
management discipline, aggressiveness
transparency, independence,  There is a positive relation between
accountability, responsibility, countries’ anti-director rights and stronger
fairness and social awareness. income smoothing.
 Wei Jiang Shareholder 5,658 firm- Alternative regression  Strong positive relation between
 Asokan rights, corporate year observation models are employed having as stronger shareholder rights and higher
Anandarajan
1 governance and for the years 1998 dependent variable earnings quality.
1 earnings quality The to 2002. Financial Discretionary Accruals as  When the major shareholder is an
Published on: influence of institutions were measured by DeChow et al. institutional investor with short-term
Managerial institutional investors excluded due to The right part of the interest in the company, then the monitoring

36
 Auditing Journal industry-specific regression models is comprised is declining significantly.
(2009) incentives for by shareholders’ rights
earnings (Gomper’ s index) and
management and institutional ownership
particular (measured in several ways).
accounting
principles.
 Marcia Millon Corporate 834 firm- As a proxy of earnings  There is a strong negative relation
Cornett governance and pay- years included in
management is used, as in most between earnings management from the
 Alan J. for performance: The the S&P 100 list
of the researches, the modified managers and monitoring from sources like
Marcus impact of earnings from 1994 to 2003.
Jones model. institutional shareholders existence,
 Hassan management Authors of this research, participation of them in the board and
Tehranian also use the Bergstresser and independent directors.
1
Philippon’s (2006) model to  On the other hand, earnings
2
Published on: measure the CEO incentive: management incidents increase in case of
Journal of (Increase in value of CEO stock existence of option compensation of the
Financial Economics and options for a 1% increase in CEO.
(2008) stock price / Increase in value of
CEO stock and options + annual
salary + annual bonus)
 Chi-Yih Yang Ownership 1353 An interesting thing about  Income smoothing in China is
 Victor Structure, Corporate companies from the this research is that the measure strongly and positively related with the
1
Murinde Governance and Stock Markets of for income smoothing is based existence of the Government as the
3  Xiaming Ding Income Smoothing in Shanghai Shenzhen on the variability of sales related controlling shareholder.
China for the years of to the variability of reported
1999 to 2006 income.
37
  Income smoothing is positively
However, the independent related to independent directors (In contrast
variables are the same with to the majority of other researches).
other researches and include
proportion of shares held by
insiders, CEO-chairman duality
and others.
Patricia Understanding Not a A comprehensive review Not a research.
Dechow, Earnings Quality: A research. of the literature upon various
Weili Ge, review of the proxies, aspects of earnings management
Catherine their determinants and its determinants.
Schrand
1 and their
4 consequences
Published on:
Journal of
Accounting and
Economics (2010)
 Charlotte J. Corporate Firms from  The main model the The research showed relation between
Wright Governance and UK and US that authors use is the modified a management buyout (MBO) and earnings
 J. Riley Shaw Investor have been involved Jones model. management. More specifically, before a
Protection: in a management’s  Total accruals (TA) are MBO, managers manipulate earnings
1  Liming Guan
Earnings buyout. The final measured as the difference downwards with the US managers being
5
Published on: Management sample was between net income and cash much more aggressive than UK.
Journal of in the U.K. and consisted of 92 UK flows from operating activities This difference in the extent of the
International U.S. (markets with firms and 63 US for the current period in year t, manipulation cannot be explained by the
high legal protection) firms. legal system as the two countries share
38
 Accounting Research scaled by total assets at year t_1; similar legal systems.
 Authors, also include
variables to depict the effect of
the companies’ industries.
 Margaret Sensitivity of 410 randomly The author uses the cross-  There is a positive relation between
Weber executive wealth to selected firms from sectional version of Jones model CEO wealth and abnormal accrual.
stock price, corporate S&P. to identify abnormal accruals  Corporate Governance doesn’t
1
Published on: governance and and then, checks for relation affect this relation.
6
Review of earnings management with Corporate Governance and
Accounting and CEO’s wealth.
Finance (2006)
 Jeffrey T. Accruals 645 firms The contribution of this  Weaknesses in internal control are
Doyle Quality and Internal with disclosed research is to fill the gap in the generally associated with poorly estimated
 Weili Ge Control over internal control literature for the relation accruals that are not realized as cash flows.
 Sarah McVay Financial Reporting weakness. between internal control and  This weakness has its routes to
Accruals quality as a possible company-level non easily auditable control.
Published on: proxy for earnings management.  On the other hand, relation with
The Accounting The accruals quality is more auditable, account-specific weakness
1
Review (2007) measured by the “Dechow and doesn’t seem to be significant.
7
Dichev (2002)” measure.
However, additional test are
implemented with measures
like: discretionary accruals
(Jones 1991), average accruals
quality (Dechow and
Dichev 2002), historical
39
 restatements (Anderson and
Yohn 2002), and earnings
persistence (Schipper and
Vincent 2003).
Mark S. An empirical 75 firms that The definition of an  No-fraud firms had boards with
Beasley Analysis of the have been reported outside director is non- significantly percentage of outside directors
relation between the to conduct fraud employee. than fraud firms had.
Published on: Board of Directors and 75 firms that The research was designed  The presence of an Audit committee
The Accounting Composition and haven’t been to control for firm-size, doesn’t affect significantly the likelihood of
Review (1996) Financial Statements reported to do so. industry, exchange market and financial fraud.
1 Fraud The selection took time period. Moreover,  The increase in outside involvement
8 part upon the additional controls were in terms of participation on the board and
records of AAERs implemented for managers shareholding has a negative relation with
issue by SEC and motivations to commit fraud and fraud.
Wall Street Journal conditions that would enable
Index. them to override board
monitoring.

Jayanthi Audit Two The empirical results are  Independence and financial
Krishnan Committee Quality subsamples: based on the comparison expertise of audit committees is negatively
and Internal Control: 1. Test between the two sub-samples. related to internal control problems.
1 Published on: An empirical sample: consisted Audit committee quality is  This result applies to both divisions
9 The Accounting Analysis of companies that measured in terms of: size, of problems.
Review (2005) changed auditors independence, expertise.
and reported The control problems are
control problems divided in the sub-categories of:
40
 on their Forms 8-K. reportable conditions and
2. Cont material weaknesses.
rol Sample:
consisted of
companies that
changed auditors
and didn’t report
control problems
on their Forms 8-K.
Nikos Vafeas Audit 252 firms According to the Strong relation is found between audit
Committees, Boards, listed in the 1995 researcher, in contrast to the committees and boards with small earnings
Published on: and the Fortune 500 survey other methods, this research: increases and negative earnings avoidance.
Contemporary Quality of with observations “this paper abstracts from the
Accounting Research Reported Earnings from 1994 to 2000 potentially noisy abnormal- Also, according to N. Vafeas: “this
(2005) creating a panel accruals based measures used in study has uncovered empirical regularities
2 with 1621 firm- prior studies by relying on small that expand the range of explanations on
0 year observations. earnings increases and negative how audit committees and boards shape
earnings surprises to measure financial reporting quality. Factors such as
earnings quality”. committee
member equity ownership, other
committee service, and, more weakly,
tenure length and board seats appear to play
some role in explaining earnings quality”.
 David F. Corporate 2,106 To depict the impact of Researchers, found that their
2
Larcker Governance, individual Corporate Governance in the “governance indices are related to future
1
Accounting firms that firm’s performance and operating performance and excess stock
41
  Scott A. Outcomes, and cover many sectors accounting outcomes, the returns. However, these indices have a very
Richardson Organizational of the economy authors have developed 14 modest and mixed association with
 Irem Tuna Performance during the years multi-indicator indices from 39 abnormal accruals and almost no relation
2002-2003 (one- individual governance with accounting restatements”.
Published on: Authors, year observations). indicators.
The Accounting alternatively try to
Review(2007) investigate the reason
for the contradictory
evidences of
Corporate
Governance.
 Joseph P.H. Corporate 1421 firms  Model used: Controlling owners seem to use
Fan ownership structure from the Asian CARit = α0 + α1NIit + accounting information for selfish reasons
 T.J. Wong and the markets that have α2NIitSIZEit + α3NIitQit + and reports loose credibility to outsiders.
informativeness of sufficient α4NIitLEVit + α5NIitSEGi + Concentrated ownership is associated
2
Published on: accounting earnings ownership, stock α6NIitVi + α7NIitCVi + (Fixed with low earnings informativeness.
2
Journal of in East Asia returns, earnings effects) + uit;
Accounting and and other financial
Economics (2002) data for empirical
analysis.
 Mark L. Earnings Not a A discussion on regarding Not a research.
DeFond quality research: research. the earnings quality research
2 Advances, challenges reviewed in Dechow, Ge and
3 Published on: and future research Schrand (2010).
Journal of
Accounting and

42
 Economics (2010)
 Patricia M. Detecting Four distinct The main contribution of As authors indicate:
Dechow Earnings samples (random, this research is the empirical  “In case of random samples, all
 Richard G. Management extreme financial comparison between the models perform satisfactory.
Sloan performance, different models for measuring  All models generate tests of low
 Amy P. known for account earnings management. power for earnings management of
Sweeney manipulation, Authors implement economically plausible magnitudes.
subject to SEC theoretical and empirical  All models reject the null hypothesis
2 Published on: enforcements) of analysis on sample research of no earnings management at rates
4 The Accounting firm years as event with each model. exceeding the specified test-levels when
Review years. applied to samples of firms with extreme
financial performance.
 A modified version of the model
developed by Jones (1991) exhibits the
most power in detecting earnings
management.”
 Masako Do Insiders 243 firms Authors, to determine  Change in R&D spending in the
Darrough Manipulate Earnings with characteristics whether insider selling year of the IPO is negatively related to
 Srinivasan When They Sell of: non-financial, influences R&D spending, managerial selling.
Rangan Their Shares in an IPOs with proceeds developed a cross-sectional  Positive association between
2
Initial Public of more than $5 regression with change in R&D discretionary current accruals in the
5 Published on: Offering? million, non-IPOs as the dependent offering year and managerial selling,
Journal of of units of shares variable and insider suggesting that selling managers manipulate
Accounting Research and warrants, selling and other control accruals as well.
(2005) no spin-offs variables as independent

43
 and equity carve- variables.
outs and no limited
partnerships.
Flora Guidry Earnings-based The sample In this research, authors  Business-unit managers manipulate
Andrew J. Leone bonus plans and consists of 103, extend previous investigations earnings to maximize their short-term bonus
Steve Rock earnings management 135, and 115 in two ways: plans.
by business-unit independent  First, the analysis is  Managers of business units in the
Published on: managers. business units conducted using business unit- MID portfolio make income-increasing
Journal of operating during level data, which reduces the discretionary accruals relative to those in
Accounting and 1995, 1994, and aggregation problem that is the UPP and LOW portfolios.
Economics (1999) 1993, respectively likely to arise using firm-level
2
in the US. data.
6
 Second, managers in this
setting are paid bonuses based
solely on business unit earnings.
The potentially confounding
effects of long-term
performance and stock-based
incentive compensation are thus
absent.
David F. Larcker Fees Paid to 62,766 firm- Accrual model builds on  The ratio of non-audit fees to total
Scott A. Audit Firms, Accrual year observations the cross-sectional modified fees has a positive relation with the absolute
Richardson
2 Choices, and Jones, while several methods are value of accruals.
7 Corporate employed to proxy for  Negative relation between the level
Published on: Governance Corporate Governance of fees (both audit and non-audit) paid to
Journal of

44
 Accounting Research auditors and accruals (i.e., higher fees are
(2004) associated with smaller accruals); this
negative relation is strongest for client firms
with weak governance.
Dechun Wang Founding 542 unique The Basu [1997] model as On average, founding family
Family Ownership firms from the S&P modified by Ball and ownership is associated with higher
Published on: and Earnings list, with 207 of Shivakumar [2005a] is adopted earnings quality.
Journal of Quality them being family for the implementation of this Consistent evidence that founding
Accounting
2 Research founded firms. research. family ownership is associated with lower
8 (2006) Period: 1994 abnormal accruals, greater earnings
through 2002 informativeness, and less persistence of
transitory loss components in earnings.
Nonlinear relation between family
ownership and earnings quality.
 H. Young Managerial Standard and A disclosure score is  Firms with low levels of managerial
Baek, Ownership, Poor’s (S&P) attributed to every company ownership, have a negative relationship
 Darlene R. Corporate Transparency and based on the S&P Transparency between the level of managerial ownership
Johnson, Governance, and Disclosure Survey and Disclosure Survey as a and the level of discretionary disclosure.
 Joung W. Voluntary Disclosure data, which depended variable. This variable  Firms with a high percentage of
2
Kim, covered 460 is then tested against managerial outside directors are more likely to disclose
9 companies included ownership, equity-based board and management processes
Published on : in the S&P 500 executive compensation, the information.
Journal of index between June proportion of outside directors,  Findings also indicate that firms in
Business & Economic and September block ownership, institutional industries with frequent merger and
Studies 2000. ownership, level of corporate acquisition activities and with managerial
control activities, a regulation
45
 dummy, level of debt, firm levels of 5% or higher are more likely to
performance and firm size. disclose ownership structure and investor
relations information.
 L.L. Eng Corporate All the firms Voluntary disclosure is  They find that lower managerial
 Y.T. Mak governance and listed on the Stock proxied by an aggregated ownership and significant government
voluntary disclosure Exchange of disclosure score of non- ownership are associated with increased
Singapore (SES) as mandatory strategic, non- disclosure.
3
at the end of 1995. financial and financial  Block holder ownership is not
0
Published on : information. related to disclosure. An increase in outside
Journal of directors reduces corporate disclosure
Accounting and
Public Policy
 Wendy Do Better- 250 They use the 2002 (first)  Better-governed Australian firms do
Beekes Governed Australian Australian firms edition of the Horwath Report as make more informative disclosures.
 Philip Brown Firms Make More rated in the 2002 our source of a measure of  Better-governed firms make more
Informative Horwath CGQ (corporate price-sensitive disclosures.
Disclosures? Corporate governance quality). It contains  Analysts’ consensus forecasts for
Governance Report corporate governance rankings better-governed firms are less biased and
3
for Australia’s top 250 more accurate.
1
Published on companies
Journal of by market capitalisation as
Business Finance & at 30 June, 2001. They award a
Accounting five star rating in which dictates
that the firm’s corporate
governance structures were

46
 outstanding.

 Faten Lakhal Voluntary 207 industrial He modelled the  Ownership is likely to lessen the
Earnings Disclosures and commercial probability of disclosing probability of making earning
and Corporate listed firms earnings voluntarily as a announcements voluntarily.
Published on: Governance: included in the SBF function of the explanatory  Large shareholders are not reliant on
Review of Evidence from 250’s index. variables using a binary minority investors' interests and retain the
Accounting & France. The sample dependant variable model (logit information they access
Finance period goes from regression).  The presence of foreign institutional
3 1998 to 2001. Corporate Governance investors has a positive effect since they
2 Variables: signal good minority protection to the
-Concentrated capital. market.
-Institutional investor's  French managers are more likely to
ownership disclose their earnings voluntarily when
-Board size there executives receive stock option plans
-Unitary leadership  French managers are less likely to
structure make voluntary earnings disclosures when

47
 -Executive stock option there is a unitary leadership structure.
compensation

 Wong A study of the A The extent of voluntary  The most significant corporate
Kar Shun relationship between questionnaire disclosure was measured by governance variable is the percentage of
 Simon S.M. corporate governance survey of the 610 using an importance-adjusted family members on board (PFM) with a p-
Ho structures and the chief financial relative disclosure index (RDI). value of 0.02.
extent of voluntary officers (CFOs) of Since only the items which were  The next most significant variable is
disclosure all listed firms in perceived by analyst and users the existence of an audit committee, which
Hong Kong and as most important were used in has a p-value of 0.049.
3
Published on: 535 financial computing the RDI the  Large firms tend to have more
3
Journal of analysts from all incorporation of users' voluntary disclosure (p < 0.01)
International investment or perceptions of importance is
Accounting Auditing brokerage firms in considered an extension in
& Taxation Hong Kong in late research.
1997 and early Corporate Governance
1998. Variables:
-Independent

48
 nonexecutive director
-existence of an audit
committee
-The existence of
dominant personalities
-The percentage of family
members on the board

 Souissi, The The paper The purpose of this paper  The paper shows a significant
Mohsen determinants of applies the meta- is to investigate the association association between disclosure and audit
 Hichem Khlif corporate disclosure: analysis technique between disclosure and seven firm size.
a meta-analysis developed by corporate characteristics which
Published on : Hunter et al. in are ownership dispersion,
International 1982 to a sample of analysts following, audit firm
3
Journal of Accounting 16 articles size, leverage, corporate size,
4 and Information published between profitability, and multi-
Management 1997 and 2006 for nationality.
the purpose of
cumulating and
integrating the
findings across
studies.

49
  Myring, Mark Corporate Our sample is They evaluate the effect of  Dispersion is not related to the two
 Rebecca Governance And The comprised of 1,150 corporate governance on the variables of interest: the percent of best
Toppe Shortrigde Quality Of Financial firms that have data financial reporting environment practices an organization follows or
Disclosures available from the by measuring the impact of  to their corporate governance rating
Corporate Library, corporate governance ratings on  the percent of corporate governance
Published on : Compustat, and the analysts' consensus and best practices followed is modestly related
The Institutional uncertainty. They test two to analysts' consensus.
International Brokers Estimates hypotheses: (1) weak corporate These results suggest that the
Business & Systems (I/B/E/S). governance will result in lower accuracy of analyst forecasts is not
Economics Research consensus among analysts and impacted by variation corporate governance
Journal (2) aggregate analysts' forecasts structures and that there is limited evidence
will be more accurate than of a relation between corporate governance
3 individual forecasts by a larger quality and the characteristics of analyst
5 margin when corporate forecasts
governance is weak.
Corporate Governance
Variables:
-Board composition,
-CEO compensation,
-Shareholder
responsiveness,
-Accounting,
-Strategic decision
making,
-Litigation and regulatory
problems,

50
 -Takeover defences

 Magnan, Corporate The sample The paper investigates  The results show that some formal
Michel governance and comprises 131 how a firm's governance maps monitoring attributes (board and audit
 Denis Cormier information firms that represent into the level of information committee size) as well as the extent of
 Marie Josee asymmetry between more than 80% of asymmetry between managers voluntary governance disclosure reduce
Ledoux managers and the Toronto Stock and investors. Governance information asymmetry.
 Walter Aerts investors Exchange stock encompasses two  This suggests that governance
3
market complementary dimensions: disclosure may complement a firm's
6
Published on : capitalization for formal monitoring attributes and governance monitoring attributes, especially
Corporate non-financial firms voluntary disclosure about board in a country such as Canada where investors
Governance and 44 percent of processes. Information have good legal protection
its total asymmetry is measured by
capitalization in either share price volatility or
Spring 2005. Tobin's Q.
 Jacqueline L Ownership, They use the The authors introduce a  The contribution of the interaction
Birt
3 Competition, and Connect 4 database new variable which unifies both variable OC alone, and, as predicted,
7  Chris M Financial Disclosure to access financial ownership and competition. Voluntary Disclosure and the interaction
Bilson reports for the Top The unifying variable OC variable OC are positively related, and

51
  Tom Smith 500 Australian is measured as the product of highly significant.
 Robert E companies for the ownership and competition.  The OC variable enhances the
Whaley years 2001 through They use the percentage of model's ability to explain voluntary segment
2003. shares held by the top 20 disclosures
shareholders to proxy for
Published on: ownership, and they measure the
Australian level of industry competition as
Journal of 1 minus the Herfindahl index of
Management industry concentration. They
test whether this new variable
enhances the ability to explain
voluntary disclosure decisions.
 Nagar, Venky Discretionary For the They use two measures to  Positive long-run relation between
 Nanda, disclosure and stock- dependent variable, study the long-run relation disclosure and stock price-based incentives.
Dhananjay based incentives management- between discretionary disclosure  Positive relation between disclosure
 Wysocki, forecast frequency, and CEOs’ stock price-based and long-term managerial wealth tied to
Peter D from the 1998 incentives. share price
version of the First Disclosure measures  Stock price-based incentives are a
3 Published on: Call database.Stock (Dependent Variable) potential mechanism that shareholders use
8 Journal of price-based  the frequency of to elicit disclosure from managers
Accounting and incentive data come management earnings forecast
Economics, 2003 from the 1997 activity.
version of  data from the AIMR
Execucomp. The survey of analyst ratings of
final management- overall disclosure quality
forecast sample
52
 covers the years Managerial Incentives
1995–1997. (Explanatory Variables)
 stock price-based
compensation
 stock price-based wealth

 Indrarini Corporate 218 firms in The author examines  Board (compensation committee)
Laksmana Board Governance non regulated whether certain board and meeting frequency and board (committee)
and Voluntary industries listed on compensation committee size are positively associated with the
Disclosure of the S&P 500 for characteristics, as proxies for transparency of board disclosure practices.
Executive 1993 and 232 firms board governance quality, are  Boards with the power to act
Published on: Compensation for 2002.The author associated with independently of top management provide
Contemporary Practices developed a the extent of board more disclosure.
accounting research disclosure index disclosure of compensation
3 consisting of 23 practices.
9 compensation-  proportion of busy
related items. outside directors
 meeting frequency
 board (compensation
committee) size
 independent boards
 the presence of dominant
CEOs

53
  Gul, Board Hong Kong A disclosure list  CEO duality is associated with
Ferdinand A. leadership, outside listed companies containing 44 discretionary lower voluntary disclosures, supporting the
 Leung, Sidney directors’ expertise for 1996 from 1997 items is reported which is in view that the position of chairman and CEO
and voluntary FT Extel Company accordance with Hong Kong should be separated.
corporate disclosures. Research Database. Accounting Standards issued by  Firms with a higher proportion of
the HKSA or International ENEDs are associated with lower voluntary
Accounting Standards (IAS). disclosures. The result is consistent with the
DSCORE, a sum of the scores substitution relationship between expert
4 awarded for each item in the outside directors and voluntary disclosure in
0 Published on: disclosure index is the monitoring manager.
Journal of dependent variable.
Accounting and Corporate Governance
Public Policy Explanatory Variables:
-CEO duality
-independent and
experienced executives

 Xiao Huafang Ownership The sample Voluntary disclosure is  Higher block-holder ownership and
 Yuan Jianguo structure, board for this paper is proxied by an aggregated significant foreign listing/shares ownership
composition and drawn from firms disclosure score (DSCORE) of is associated with increased-voluntary
4 corporate voluntary listed on the SSE of background information, disclosure.
1 disclosure; Evidence China at the end of business information, financial  Managerial ownership, state
Published on: from listed 2002 and comprises information and other non- ownership and legal-person ownership are
Managerial companies in China of 559 firm financial information. not related to disclosure.
Auditing Journal, observations. Corporate Governance
54
 2007 Variables:  An increase in Independent directors
- Ownership structure improves voluntary disclosure and CEO
(block holder, managerial, state, duality reduces disclosure.
legal-person ownership and  Larger firms have greater disclosure,
foreign listing/shares while firms with growth opportunities are
ownership) reluctant to disclose information.
- percentage of
Independent Directors
- CEO Duality

 Robert E. Essays on An evaluation Verrecchia categorizes  He recommend information

Verrecchia Disclosures of “Essays on disclosure research into three asymmetry reduction as a vehicle to
Disclosures” and broad groups-association-based, integrate the efficiency of disclosure choice,
the disclosure discretionary-based, and the incentives to disclose, and the
literature in efficiency-based endogeneity of the capital market process as
Published on: accounting Association based it involves the interactions among
Journal of research investigates the relation individual and diverse investors.
4
Accounting and between exogenous disclosure  He argues that disclosure models
2 Economics, 2001 and change in investors' can be characterized as an eclectic mingling
individual actions. of highly idiosyncratic economic-based
Discretionary-based research models, and challenges researchers to take
investigates how firms use their the first steps to unification.
discretion regarding information
that does not require mandatory
disclosure. Efficiency-based
research examines unconditional
55
 disclosure choices characterized
by endogenous consumers.

 Mark Bagnoli Financial The study They prove the following  the values of the private information
 Susan G. Reporting and shows how a theorems: the manager discloses depend on the
Watts Supplemental manager's  If, overall, the firm's content of the financial report
Voluntary voluntary financial reports contain bad  the probability of voluntary
Disclosures disclosure is (good) news, then the manager disclosure also depends on the content of
affected by the voluntarily discloses large the reports
Published on: content of the firm's (small) values of her private
4
financial reports. information.
3
Journal of The authors assume  if the firm's financial
Accounting Research, that the manager's reports contain good (bad) news
2007 private information aboutx1, then the manager
complements the discloses small (large) values
mandatory ofσ11and her decision does not
disclosure and depend on the other information
show that the contained in the firm's financial

56
 content and reports
likelihood of a
voluntary
disclosure depend
on whether the
mandatory reports
contain good or bad
news.

 Gray, Sidney J Family Hand- They used the voluntary  At moderate to low levels of family
 Gerald Chau ownership, board collected data on disclosure instrument developed shareholding (25% or less), the convergence
independence and voluntary by Meek et al., 1995 to measure of interest effect becomes dominant and the
Published on: voluntary disclosure: disclosure for a the extent of voluntary level of voluntary disclosure is lower.
Evidence from Hong sample of 273 disclosure by companies in HK.  At high levels of family
Journal of Kong. listed firms in on Corporate Governance shareholding (above 25%), the
4
international the Main Board of Variables: entrenchment effect becomes dominant and
4 accounting, auditing the HKEx in Hong - Family ownership causes the level of voluntary disclosure to
& taxation, 2010 Kong for the year - Independent Chairman increase.
2002. - Independent non-  the appointment of an independent
executive directors chairman is positively related to the level of
voluntary disclosure and mitigates both the
influence of independent non-executive
directors and family ownership levels.

57
  Leung, Sidney Director 376 Hong The study uses voluntary  High (concentrated) board
 Horwitz, Ownership and Kong listed segment disclosure above the ownership explains the extent of low
Bertrand Voluntary Segment companies for benchmark minimum as a proxy voluntary segment disclosure and this
Disclosure: Hong 1996. for transparency and examines negative relationship is stronger when firm
Kong Evidence. its relationship to the ownership performance is very poor
structure and composition of  The contribution of non-executive
4
corporate boards in Hong Kong. directors to enhance voluntary segment
5
Published on: disclosure is effective for firms with low
Journal of director ownership but not for concentrated-
International ownership firms.
Financial
Management &
Accounting, 2004
 Brian Bushee Corporate All firms They measured disclosure  Firms with higher AIMR disclosure
 Christopher disclosure practices, rated by AIMR using the annual ranking of rankings have greater institutional
Noe institutional between 1982 and corporate disclosure ownership, but the particular types of
investors, and stock 1996, which results practices published by the institutional investors attracted to great
return volatility. in a sample of Association for Investment and disclosure have no net impact on return
4 4,314 firm-year Management Research (AIMR) volatility.
6 Published on: observations.  Yearly improvements in disclosure
rankings are associated with increases in
Journal of ownership primarily by "transient"
Accounting Research, institutions, which are characterized by
2000 aggressive trading based on short-term
strategies

58
  Charles Chen Association The sample The study examines  There is a positive association
 Bikki Jaggi between independent covers a two-year whether comprehensive between the proportion of INDs on
non-executive period of 1993 and financial disclosures, used as a corporate boards and comprehensiveness of
directors, family 1994 using the proxy for corporate board’s financial disclosures
Published on: control and financial 1997 version of the responsiveness, are positively  This association is weaker for
disclosures in Hong Global Vantage associated with the proportion family controlled firms compared to non-
Journal of Kong. database and of independent non-executive family controlled firms
Accounting and including 87 large directors (INDs) on corporate  The results suggest that inclusion of
4
Public Policy, 2000 companies in boards, and whether family INDs on corporate boards could improve
7 Hong-Kong. control of the firm has an impact firms’ compliance with disclosure
on this association. requirements, which would result in more
They used the disclosure comprehensive financial disclosures.
instrument developed by
Wallace and Naser (1995) to
measure the comprehensiveness
of financial disclosures within
the framework of mandatory
disclosure requirements.

59
  Paul M. Information They provide The authors present a Main Conclusions:
Heally asymmetry, corporate a framework for disclosure framework  Regulated financial reports are
 Krishna G. disclosure, and the analyzing comprising four aspects: informative to investors, and the degree of
Palepu capital markets: A managers’ regulation of disclosure; informativeness varies systematically with
review of the reporting and auditing/intermediaries and firm and economy characteristics
Published on: empirical disclosure disclosure decisions disclosure, managers’ disclosure  Financial analysts add value in the
literature. in a capital markets decisions, and capital market capital market through their analysis of
Journal of setting, and identify consequences of disclosure. firms’ financial reporting decisions,
Accounting and key research Disclosures are forecasts of future earnings, and buy/sell
Economics 2001 questions. approached from the aspect of : recommendations.
-Capital market  There is a market-driven demand for
4 perspective auditing services
8 - Positive accounting  Both financial analysts and auditors
perspective are imperfect intermediaries, in part because
- Behavioural accounting of incentive conflicts
perspective  Managers’ financial reporting and
- Agency-theory disclosure choices are associated with
perspective contracting, political cost, and capital
market considerations.
 Disclosure is associated with stock
price performance, bid-ask spreads,
analysts’ following, and institutional
ownership.

60
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