The Impact of Managerial Opportunism on Earnings Reliability

Abstract

This study is motivated by the increasing incidences of corporate failures caused by fraudulent accounting and breaches in corporate governance and ethical conducts. For example, it is expected that managers will resort to activities that are not consistent with appropriate governance and ethics just to keep up with the market expectations to safeguard their position. This study investigates the impact of five managers " opportunistic incentives on the reliability of firms " reported earnings (namely free cash flow, abnormal capital expenditure, bonus plan, distress sign and leverage), controlled by six other widely implemented standard structural governance mechanisms. The earnings reliability tests are conducted using the balanced panel data analysis specification covering 323 sample firms with continuous accounting and corporate governance data of 15 years beginning 1993. Consistent with literature, the results reveal that firms " earnings reliability is significantly related to all managerial opportunism attributes, implying the adverse effect of these incentives on the usefulness of accounting information in assessing management " s stewardship. These findings suggest the need for a better management mechanism to integrate governance and effective enforcement of control requirements to mitigate managerial opportunism and hence uphold the quality of published accounting information.