Corporate Governance and Earnings Management: Evidence from Canada

Abstract

This paper investigates the relation between corporate governance and earnings management in the Canadian setting characterized by ownership concentration in the hands of large shareholders and a separation between ownership and control. We find that earnings management decreases with the level of cash flow rights of the largest ultimate owner and increases with the magnitude of separation between its control and cash flow rights. Earnings management is higher in firms controlled through pyramidal structures and multiple classes of shares, and lower in firms where there is a second ultimate owner with sufficient bargaining power vis-à-vis the largest ultimate owner. Finally, earnings management is higher in family controlled firms. Our results highlight the importance of firm-specific corporate governance in determining earnings management.