Earnings management, risk and corporate governance in US companies

Abstract

The company directors seem to reconcile interests of shareholders and stakeholders before determining the published results. The aim of the paper is to analyse how the risk level could be affected by some governance mechanisms and if the risk is a motivation for earnings management. We identified three types of risk: overall risk, operational risk and financial risk. Our study focused on 222 U.S. firms and covers the 1994-2001 period. The results of an empirical study of U.S. companies indicated that earnings management is positively correlated with the risk, whatever its type, that means that good governance practices tend to decrease the risk. Nevertheless, good practices may differ according to the type of risk. We also found that good practices have a negative impact on earnings management while all types of risk have a positive impact on earnings management.