Publication: Managerial entrenchment and earnings management
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2017-10-01
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Elsevier
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Abstract
Agency theorists have long contended that managerial entrenchment is detrimental for shareholders,
because it protects managers from the discipline of corporate governance. However, as a
competing hypothesis, we argue that entrenchment can also provide benefits for the firm’s
owners: it leads managers to be less myopic in managing earnings to meet short-term financial
reporting goals. Our findings are consistent with this prediction as they suggest that, when there
are incentives to manipulate firms’ performance, entrenched managers are less prone to engage
in earnings management activities that hurt shareholders. Specifically, we focus on firms that just
meet or marginally beat earnings benchmarks and document a negative association between
managerial entrenchment and both the opportunistic use of accruals and the manipulation of real
activities. We also show that earnings management is less detrimental to firm value if the
manager is entrenched. Finally, we find that these effects of entrenchment on earnings management
are only present for firms domiciled in Delaware.
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Keywords
Managerial entrenchment, Earnings management
Bibliographic citation
Di Meo, F., García Lara, J. M., & Surroca, J. A. (2017). Managerial entrenchment and earnings management. Journal of Accounting and Public Policy, 36 (5), pp. 399-414.