The influence of corporate boards and ownership structures on the relation between overvaluation and earnings management

The influence of corporate boards and ownership structures on the relation between overvaluation and earnings management

Student number: 11151145

Thesis supervisor: Sanjay Bissessur Date: 22 January 2018

Word count: 10.528

MSc Accountancy & Control, specialization Accountancy Faculty of Economics and Business, University of Amsterdam

Statement of Originality

This document is written by Tom Stekelenburg, who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Content

II.II Literature review ... 5

II.III Hypothesis development or analytical framework ... 20

III Research method ... 22

III.I Type of Research ... 22

III.II Research design ... 22

III.III Sampling Method ... 26

IV Results ... 29

IV.I Descriptive statistics ... 29

IV.II Correlation ... 30

IV.III Regression ... 33

V Conclusion ... 36

V.I Discussion ... 36

V.II Future research ... 37

VI Bibliography ... 38

Appendix A... 41

I Introduction

In the last crisis, which was already nine years ago, we have seen many good companies end up in ruins and watched a lot of senior managers becoming imprisoned as a result of that. No doubt we will undoubtedly hear of more investigations, more prison terms, and more damaged reputations. Stakeholders have witnessed value destruction in the hundreds of billions of dollars. However, what went wrong? Did a fit of greed overtake managers? Did they wake up one morning and decide to mislead stakeholders? No. Although there were some managers with bad intentions, the cause of the problem was not the people but the system in which they were operating. A system in which equity became so dangerously overvalued that many CEOs and CFOs found themselves caught in a vicious bind where excessively high stock valuations released a set of damaging organizational forces that led to massive destruction of corporate and social value (Jensen, 2005). This process was, among other things, initially pressured by shareholders and corporate governance (Andreou et al., 2016).

This study examines how overvaluation affects management’s use of accrued earnings

management. Specifically, this study examines the influence of corporate boards and ownership structures on the relation between overvalued equity and management’s use of accrued earnings management. This study is a broadening of the already obtained information by Badertscher (2011). Badertscher’s study focused on the extent to which the degree and duration of overvaluation affect management’s choice of alternative earnings management mechanisms. Jensen’s (2005) agency theory of overvalued equity suggests a ‘‘vicious bind ’’ that ensnares managers of highly overvalued firms. That is, Jensen (2005) states that, when a firm’s stock becomes overvalued, managers engage in a variety of types of earnings management to preserve overvaluation.

Jensen (2005) predicts that managers are likely to engage in two main types of earnings management practices to meet the unrealistic performance expectations incorporated in an overvalued stock price. These types are Real Transactions Management (RTM) and Accruals Management (AM). RTM refers to the purposeful altering of reported earnings in a particular direction by changing the timing or structuring of an operating, investing, or financing decision. Accruals management refers to the purposeful altering of accruals in a particular direction that is achieved when managers adjust revenue or expense accruals to alter financial reports. This study only focusses on Accruals earnings Management (AM).

There is limited empirical evidence on the relation between the overvaluation and management’s use of accrued earnings management. This study links overvaluation and the use of earnings management by using the residual income model of Edwards and Bell (1961) and Ohlson (1995) (hereafter, the EBO model) to estimate overvalued equity. The EBO model that is based on analysts’ forecasted earnings has been used extensively in finance and accounting literature. Earnings and earnings growth are key components in determining firm value. Since earnings management artificially increases earnings and earnings growth expectations, it can ultimately inflate firm value in order to sustain overvalued equity (Dechow et al. 2000).

Barton and Waymire (2004) found that there is a link between earnings quality and overvaluation by providing evidence that suggests that poor information about a firm’s fundamentals is related to overvaluation. In addition, prior research indicates that managers are aware of the opportunities to manage earnings (Nelson et al. 2002, 2003), investors are unlikely to see through it (Sloan 1996; Xie 2001), and managers are often rewarded for engaging in earnings management that allows the firm to meet or beat analysts’ targets (Myers et al. 2007). Overvalued firms have strong incentives to sustain their overvalued equity, such as increasing the welfare of the manager with more

profitable stock options or bonuses tied to the firm’s performance.

Given these various incentives, this study examines the influence of corporate boards and

ownership structures on the relation between overvaluation and earnings management. Specifically, this study predicts that the worse the corporate boards and ownership structures are, the more likely it is that the firm will engage in earnings management. In summary, this study investigates how the corporate boards and ownership structures affect the relation between overvaluation and accrual earnings management and sheds light on how the company is designed to sustain overvaluation.

I.II CONTRIBUTION

This study contributes to the literature on overvaluation and earnings management in several meaningful ways. First, this study extends and empirically tests Jensen’s (2005) agency theory of overvalued equity. Second, this study broadens the view of recent research by Chi and Gupta (2009), who examined the relation between overvaluation and accruals management and found that overvaluation intensifies accruals management. Although our studies are related, this study focuses

and the management’s use of accruals management. Finally, this paper studies if the significant relation between overvaluation and earnings management, as found in the study of Badertscher (2011), can only exist with a poor corporate board and ownership structure. Overall, the results of this study provide a complete picture of the relation between overvaluation and the use of earnings management. These results are informative to regulators, investors, audit committees, and financial analysts who seek to understand the role that corporate boards and ownership structures play in the relationship between overvaluation and the use of accrued earnings management better.

Chapter II will discuss prior literature and establish a theoretical framework for this study. Section III describes the research design and the sample selection. Section IV discusses the descriptive statistics, describes the study’s results, and tests for potential indigeneity. Section V concludes by discussing the implications of the findings and suggesting ideas for future research.

II Theory

II.I INTRODUCTION

This chapter discusses the prior literature and establishes a theoretical framework for this study. Firstly, it discusses the motivation of earnings management in overvalued firms. Secondly, it offers an economic theory framework for this study. Thirdly, prior literature is reviewed concerning overvaluation and earnings management. Additionally, it substantiates the choices made in this study. Further, the influence of corporate governance on earnings management and overvaluation is discussed. Finally, it states the moderators chosen for this study.

II.II LITERATURE REVIEW

II.II.I Motivation of earnings management in overvalued firms

In Jensen’s (2005) agency theory of overvalued equity, excessively high stock valuations forces managers to engage in earnings management with the purpose of sustaining upward trends in earnings and stock price. Jensen (2005) posits that when a firm’s stock price becomes overvalued (i.e., 100%—or even 1,000%—above underlying firm intrinsic value), the risk at conflicts of interest between managers and owners increases. According to Jensen (2005, 7), overvaluation sets in motion certain organizational forces, including earnings management, that lead to the destruction of a part, or all, of the core value of the firm:

“Corporate managers and the financial markets have been playing a game similar to the budgeting game. Just as managers’ compensation suffers if they miss their internal targets, CEOs and CFOs know that capital markets will punish the entire firm if they miss analysts’ forecasts by as much as a penny. Generally, the only way for managers to meet those expectations year in and year out is to cook their numbers to mask the inherent uncertainty in their business. Moreover, that cannot be done without sacrificing value.”

The managers of overvalued firms not only resist market correction of overvalued stock prices but also actually attempt to prolong overvaluation by engaging in earnings management that increases reported income. Managers do not seek overvaluation for their own sake but rather because it is an intermediate step towards increasing the welfare of the manager, through incentives like stock options and bonuses that are often tied to firm performance. In other words, the more overvalued the equity, the greater the incentive to sustain such overvaluation since the managers’ wealth is tied to the firm’s stock price. This dependence renders little incentive for the manager to correct the overvaluation. At the same time, lack of incentive does not imply that managers will engage in earnings management, because, as outlined more specifically below, the costs of earnings management can be extremely high for both the manager and the firm.

As Jensen (2005) argues, the source of the agency problem is that managers cannot, except by pure luck, produce the earnings performance required to sustain an overvalued stock price without engaging in earnings management. In addition to that, Badertscher (2011) posits that certain aspects of the corporate boards and ownership structures positively affect the use of earnings management. This effect could explain much of the relation between overvaluation and the use of earning

management mechanisms as studied by Ghosh, Marra, & Moon (2010). Concluding, the underlying assumption is that some aspects of corporate boards and ownership structures, provided by

Badertscher (2011), explain the strong relationship studied by Ghosh, Marra, & Moon (2010) between overvaluation and the use of earnings management.

II.II.II Agency theory

Economic theories aim to provide a coherent and systematic framework for researching,

understanding and developing various accounting practices. The economic phenomena of earnings management are mainly supported by the agency theory.

The agency theory was developed in the 1960’s and early 1970’s by Arrow (1971) and Wilson (1968). The theory describes the relationship between two parties, in which one party (the principal) delegates responsibilities to the second party (the agent). However, this relationship has two main problems (Eisenhardt, 1989):

1. Misalignment of goals between principle and agent; and 2. information asymmetry between the two parties.

In other words, the information asymmetry in this relation is caused by the principle handing out the work to the agent while never receiving all the information about the agent’s actions. Because of

this imbalance of information, the agent obtains space to perform unmonitored actions in his interest. Besides, most of the time the agent is also more skilled and has more knowledge

concerning the work performed, this even increases the information gap. The agent acts in the name of the principal, but the principal cannot adequately check this. One of the many things agents can perform due to this information asymmetry is earnings management. Common principle-agent relationships are shareholders-board and board-manager. That is why in this paper the effect of the corporate board and ownership structure on the relation between overvaluation and earnings management is studied.

II.II.III Overvaluation

Causes of Overvaluation

There are a variety of causes for overvaluation of a firm, yet these are difficult to pinpoint and identify empirically. While prior finance and accounting research does not identify the exact cause of overvaluation, it does provide evidence that overvalued firms are associated with a pattern of high earnings growth expectations (Jensen 2005). A history of mergers and acquisitions (Travlos 1987; Moeller et al. 2004); and greater analyst dispersion, which can lead to mispricing and, in particular, overpricing due to the differing opinions of firm value (Anderson et al. 2005).

Measurement of Overvaluation

Jensen (2005, 5) states that equity is overvalued when ‘‘a firm’s stock price is higher than its underlying value.’’ In other words, it occurs when the ratio of stock price to underlying value exceeds 1. This study estimates the firm’s underlying value by using the EBO residual income approach, following Edwards and Bell (1961) and Ohlson (1995). This study empirically estimates the EBO model following Frankel and Lee (1998), as follows:

The formula above includes the following variables: - Vt is the stock's fundamental value at time t. - Bt is the book value at time t.

- ROE is the return on equity. - The cost of equity capital, re.

Since some variables in the EBO model are separate formulas, they will be explained below.

Frankel and Lee (1998) posit that if a firm earns future accounting income at a rate exactly equal to its cost of equity capital, then the present value of future residual income is zero, and Vt=Bt. In other words, firms that neither create nor destroy wealth relative to their accounting-based

shareholders' equity, will be worth only their current book value. However, firms whose expected ROEs are higher (lower) than re will have values greater (lesser) than their book values.

Book value

Book value per common share is a measure used by owners of common shares in a firm to determine the level of safety associated with each share after all debts are paid accordingly

(Investopedia, 2003a).

Return on Equity (ROE)

Return on Equity is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Investopedia, 2003b).

ROE is expressed as a percentage and calculated as:

Net income is for the full fiscal year (before dividends paid to common stockholders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Cost of Equity

The cost of equity is the return that stockholders require for their investment in a company

(Investopedia, 2012). The traditional formula for cost of equity (AVERAGE_COE) is the dividend capitalization model:

A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership. A company that earns a return on equity more than its cost of equity capital has added value.

II.II.IV Earnings management

In short, earnings management is an act of intentionally influencing the process of financial reporting to obtain some private gain. Earnings management involves the alteration of financial reports to mislead stakeholders about the organization's underlying performance or to influence contractual outcomes that depend on reported accounting numbers (Dechow et all. 1995). Earnings management can only occur when there’re agency issues such as among others poor corporate board and organizational structure.

Dechow (1994) posits that earnings management occurs Because the operating income consists of two elements. The first element is the company’s cash flow (CF) and the second element, total accruals, equals the difference between operating income and the cash flow. Accruals are items on the balance sheet which represent the recognition of an economic event regardless of when the corresponding cash flow occurs. The use of accrual accounting is associated with a decrease in the reliability of the economic performance (Johnson, 2005). Just as operating income consists of two elements so do the earnings management methods: 1) real based earnings management and 2) accruals-based earnings management.

Real based earnings management

Firstly, real based earnings management is a purposeful action to alter reported earnings in a particular direction, which is achieved by changing the timing or structuring of operation, investment, or financing transaction, and which has suboptimal business consequences (Zang, 2012). The idea that firms engage in real activities manipulation is supported by the survey evidence in Graham et al. (2005). They report that 80% of surveyed CFOs admitted that, to reach earnings goals, they would decrease research and development (R&D), advertising, and

maintenance expenditures, while 55% stated they would postpone a new project, both of which are real activities manipulation.

Accruals-based earnings management

Secondly, accruals-based earnings management is achieved by changing the accounting methods, or estimates used when presenting a given transaction in the financial statements (Zang, 2012).

Accrual accounting can be divided into two components: non-discretionary accruals and

discretionary accruals. First, non-discretionary accruals are accruals which arise from continuing operations. The manager has little or no influence on this. The non-discretionary accruals are related to economic conditions in which the company finds itself. Second, discretionary accruals are the difference between a firms’ actual accruals and the usual level of accruals (non-discretionary accruals). Discretionary accruals can be influenced by the management of a firm and therefore is this linked to earnings management (Johnson, 2005). The discretionary accruals include working capital and depreciation. The working capital consists of: debtors, stock, and creditors. For example, the manager may influence the debtors by changing the credit term or making a provision for bad debts.

According to the prior literature that documents a substitutive relation between real and accrual-based earnings management. Zang (2012) documents that managers trade off the two earnings management mechanisms based on their relative costs. Specifically, she finds that firms with less accounting flexibility due to excessive accrual manipulation in prior years or shorter operating cycles tend to use real earnings management to a greater extent. On the other hand, firms use more accrual-based earnings management when they are (1) less competitive in the industry, (2) in lower financial health status, (3) subject to higher monitoring from institutional investors, and (4)

associated with more significant tax expenses. This study predicts that management of overvalued firms has more incentives to use accruals-based then real based earnings management. This claim is supported by Badertscher (2011), who states that “The duration of overvaluation impacts the use of accruals-based earnings management, but the use of accruals-based earnings management decreases as the duration extends beyond three years. Though this statement, this study focuses on accruals-based earnings management.

Measurement of earnings management

The Modified Jones Model is a widely used model to measure accruals-based earnings management (Zang, 2012). The precursor of the modified Jones model is the Jones model. However, the

difference is that the change in revenues is adjusted for the change in receivables in the modified Jones model. In the Jones model, there is the possibility that discretionary accruals are measured with an error Because it is not taken in account that there could be manipulations in revenues, so the

revenues should be corrected for account receivables (Dechow et al., 1995). That is why this study believes the Modified Jones Model is a better fit for this thesis.

The formula for the cross-sectional modified Jones model is:

TAt /AVA= α0 + α1 (1 / AVA-1) + α2 ((ΔREVt – ΔRECt) /AVA) + α3 (PPEt / AVA) + εt (1)

The formula above includes the following variables:

• TAt is the total accruals in year t, which is calculated by net income in year t minus the cash flow from operating activities in year t.

• AVA is the average total assets.

• ΔREVt is the change in revenues between years t and t-1. • ΔRECt is the change in receivables between years t and t-1. • PPEt is the level of property, plant, and equipment in year t. • εt is the proxy for the level of discretionary accruals in year t. • α0, α1, α2, and α3 are firm-specific parameters.

Estimates of the firm-specific parameters α0, α1, α2, and α3 are all set to 1. This Because this study focusses on the nonfinancial companies in North-America.

II.II.V Corporate Governance

This study assumes that corporate governance has a significant explanatory role in the relationship between overvaluation and earnings management. However, what is corporate governance in short? Corporate governance is a term for the way in which companies are managed and how they are monitored. Different parties each fulfill their role.

This paragraph will focus on specific aspects of corporate governance. First, the origin will be discussed. Second, we will go deeper into the true meaning of corporate governance. Moreover, last we will explain the relationship between corporate governance and overvaluation combined with the management incentives.

Origin of corporate governance

The origin of corporate governance in institutions has existed since time immemorial. Long ago all social responsibilities were carried by the rulers (in other words: the kings), who carried the

responsibility of governing the kingdom. In those times, the welfare of the inhabitants was the concern of the ruling class. In the present, the responsibility of governing lies with the government. However, in the current times, a new player, referred to as the private sector, entered the field. The responsibilities of the private sector reach out over governing the corporations. Though it may not be directly responsible for the welfare of the people it has a prominent role to play in the welfare of the society (Andreou et al., 2016).

The private sector needs to support the government to enable them to fulfill their governance duties and obligations towards the society. Although the private sector can only support the government and contribute when it is doing well, it is also constricted by the laws and policies enacted by the government. This government-society private sector relationship leads to a realization of the private sector of its social responsibilities which directly resulted in private sector involvement in former government activities, which supported the government to discharge some of its responsibilities to the private sector. Besides the supporting of the government, the private sector also has a

responsibility towards the expectations of its stakeholders. This responsibility of the private sector is the aspect which will be focused on during this study.

Meaning of corporate governance

Any governance is carried out by a group of individuals. Therefore, corporate governance can be stated as a collaboration among different individuals for governing the direction and performance of

a corporation (Kummamuru, 2016). Here direction does not suggest the organizational strategy but the progress of the organization towards its commonly defined objectives.

Corporate governance is defined by Keasey et al. (2005) as a set of mechanisms that induce the self-interested controllers of a company to make decisions (regarding the company operation) that maximize the value of a company to its owners (i.e., the suppliers of capital).

However, in the present world, whenever the field of corporate governance is addressed, the focus is more on the financial component and role of the board of directors. The different definitions of corporate governance form the prior literature are presented below for a better understanding:

• Shleifer and Vishny (1997) in their article describe corporate governance as the means by which a company’s financiers guaranteed themselves of getting significant returns on their investments.

• Davis and Ronald (2010) in their work suggest “In broad terms, corporate governance refers to the way in which a corporation is directed, administered, and controlled.”

• Blair (1996), an economist, says, “Corporate governance is about the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated.”

• Monks and Minow (2004) in their book on corporate governance state, “Corporate governance is the relationship among various participants (chief executive officer, management, shareholders, employees) in determining the direction and performance of corporations.”

• According to American Management Association (1999), “Corporate governance is about how suppliers of capital get managers to return profits, make sure managers do not misuse the capital by investing in bad projects, and how shareholders and creditors monitor managers.”

• International Chamber of Commerce (1999) says “Corporate governance is the relationship between corporate managers, directors and the providers of equity, people, and institutions who save and invest their capital to earn a return.”

• The Corporate Governance Forum of Japan (1999) comments “Corporate governance by definition rests with the conduct of the board of directors, who are chosen on behalf of the shareholders.”

• As per the ASX Principles of Good Corporate Governance and Best Practices

Recommendations (2003), “Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized.”

Stakeholders interests/roles

Though, as stated earlier, corporate governance has a broader perspective and is not just limited to the functions of the board of directors and management to serve the interest of the stakeholders. Outside of the board of directors, management and investors there are other stakeholders like the society, government, consumer, and employees. These stakeholders all have their interests and aspects impacting the corporate government which is presented in the table below.

Stakeholders Interests and Their Impacts

Stakeholder Interest Aspect(s) Impacting

Governance

Society Development of Economy Economic

Government Law Abiding Tax Payer Legal and Political

Consumer Reasonably Priced

Dependable and Good Quality Services

Ethical

Employees Decent Salary, Welfare and Respect

Management

Investors Return on Investment and Respect as a Business Partner

Financial

Tabel 1: Stakeholders Interests and Their Impacts Source: Kummamuru (2016, 5)

We can conclude from this table that corporate governance is not limited to the financial aspect alone but also involves aspects of economics, law, political, ethical, management and others. This study is limited to the stakeholders mentioned above. Which are considered to be the most

important subsystems of a business organization (Kummamuru, 2016).

The Organization for Economic Cooperation and Development (OECD), an international think-tank defines CG as:

“Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions in corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance.”

This definition goes far beyond the previous ones stated. The main difference is that it

acknowledges that corporate governance is a system of rules and ideas related to governance and includes all essential areas and subsystems that are part of a corporate body. However, why do we need corporate government?

Need for corporate governance

The need for good corporate governance arises from the obligation of the corporation to fulfill the expectation of its different stakeholders (Kummamuru, 2016). Over the last two decades, the

corporate government became a hot topic. This because of its importance for the economic health of corporations and society in general. The headlines of the past decades announced a severe lack of good corporate governance. Some examples of corporations included in these headlines are WorldCom, Anderson, Merrill Lynch, Enron, Qwest Communications, Putnam, Boeing, Rite Aid, Tyco International, Merck, Computer Associates, ASEA Brown Boveri, Swiss Air, XEROX. Since the entire economic system, on which the investment returns depend, is showing signs of stress due to corporate failures, dubious accounting practices, abuse of corporate power, fraud, criminal investigations, mismanagement, and excessive executive compensation (Kummamuru, 2016), investors’ confidence in the corporation has diminished.

Despite the fact that a number of these failures can be directly linked to fraudulent accounting and other illegal practices. Plentiful could also be linked to corporate governance risks like conflicts of interest, inexperienced directors, very high compensation, and unequal share of voting rights

besides others. Because of these failures, there has been a renewed focus and emphasis on corporate governance (Kummamuru, 2016). The need for good corporate governance is established with the text above. The following logical question which comes up will be: who is responsible for which component of corporate governance?

Who is responsible for corporate governance

Corporate governance is an activity carried out by the Board of Directors and the management on behalf of the stakeholders (Kummamuru, 2016). However, each stakeholder is able to influence this governance directly or indirectly. The table below gives an inside in the roles of the investors, Board of Director and the management.

Role of Stakeholders

Investor Board of Directors Management

Provide capital for running the corporation

Appointed by investors Appointed by the Board of Directors

Responsible to the investors Responsible to the Board of Directors

Responsible for long-term interest of the corporation

Responsible for the operations of corporation

Delegate power to Board of Directors and management for running the corporation

Responsible for safeguarding assets of the corporation

Responsible for taking risks and making decisions for running the corporation Tabel 2: Role of Stakeholders

Source: Lynn (2000).

These three stakeholders are mainly responsible for governing the company. First, the investors are responsible for providing the necessary capital for running the corporation. In return for this, they receive company stock, which generates dividend if the company performs well. They are not concerned with day-to-day business and delegate this to the Board of Directors and the

management. This separation between ownership and running the actual business is the source of the agency problem. However, they have the responsibility for reviewing and approving significant investments and global courses which the corporation is to make in business. They are part of the entity’s external corporate governance. Second, the Board of Directors is the link between the people providing capital and the people who use the capital for creating value. The role of the Board of Directors is to create value for the investors and monitor the functioning of the management. The performance of the corporation is steered by providing incentives for the management and

corrective actions if necessary. These corrective actions include replacing the managers in the interest of the organization. Third, the management is responsible and accountable for running the day-to-day operations. They are combined with the Board of Directors the entity’s internal

corporate governance. They need to work closely with the Board of Directors and support them in the process of realization of the corporation’s vision. The management is given incentives by the Board of Directors to take risks to create company value. These incentives are also known as performance bonuses. However, when a manager fails in creating value for the company, the Board of Directors will be forced to perform corrective measures.

This framework pushes managers to take risks and creating company value. This creation of value will have its effect on the company’s stock market prices. Besides the payment of dividend, is the increase of owned company stock, and by this also their invested capital, also a development which investors demand to see. However, is it possible for the managers to continually improve the companies performs compared to previous years? There is much debate about this, but in the long-run, it cannot be done. However, in many cases, this is what’s expected of the investors. So if the managers like to remain within their company and collect their performance bonuses that is what they do. This pressure incents managers to perform earnings management. By this method of reporting to the Board of Directors and the investors, they can show steadily increasing value creation over the years. However, they eventually come to the point of not being able to mask the real performance of the company anymore. Results could be catastrophic, and the overvalued stock prices could plummet.

Corporate governance and overvaluation

Andreou et al. (2016) studied which corporate governance attributes, amongst the many that firms employ, are the most prominent ones in explaining the link between corporate governance and future stock price crashes. They conclude that the chance of stock crashes increase with transient institutional ownership, CEO stock option incentives and the percentage of outside directors that hold shares, and decrease with the percentage of stocks held by insiders, the level of accounting conservatism, board size and the existence of a formal governance policy in the companies’

mandate. These findings are consistent with the studies stated in the previous paragraph. Because of all these findings, this study assumes that corporate governance significantly influences the

II.II.VI Moderator

Finally, this chapter substantiates the choices made for this study and reviews the prior literature concerning these moderators. The two main moderators are 1) corporate board and 2) ownership structure. These moderators are divided into two or three measurable variables.

Corporate board

Firstly, these corporate board elements which have a positive relationship on the use of earnings management have been subtracted from the prior literature of Ghosh, Marra, & Moon (2010).

Board composition

Ghosh, Marra, & Moon (2010) states that outside directors are considered to be more efficient in monitoring management than inside directors Because they are often the key decision-makers in other firms, and also Because they are more concerned about their reputation in the managerial labor market (Fama and Jensen, 1983). Further, outside directors are expected to be more objective and possess greater expertise than affiliated directors (Braiotta, 1999). Therefore, boards with a higher percentage of outside directors are presumed to be more independent. Ghosh, Marra, & Moon (2010) posits that independent directors are better monitors of the financial reporting process and the relationship between board composition and earnings management is strong. These

arguments posit a positive relationship between inside directors and earnings management.

Board size

Jensen (1993) claims that a streamlined board is more effective in monitoring management. As more directors are added, the incremental cost of poorer communication and decision-making associated with larger groups are likely to overwhelm advantages of a larger board. Consistent with this view, Yermack (1996) finds an inverse relationship between market value and board size. Thus, smaller boards are likely to be more efficient in monitoring earnings management. These arguments posit a positive relationship between large boards and earnings management.

Board structure

In this study, we analyze one aspect of the board structure. CEO duality – Jensen (1993) posits that the role of the Chair of the board is to monitor the CEO. Therefore, CEO-Chairs cannot perform both functions without conflicts of interest. For the board to be effective and to perform its critical functions, it is essential that the positions of the chairman and CEO be separate. These arguments posit a positive relationship between CEO/Chair duality and earnings management.

Ownership structure

Secondly, this ownership structure element which has a positive relationship on the use of earnings management has been subtracted from the prior literature of Siregar & Utama (2009) and

Bergstresser & Philippon (2006).

CEO ownership

Bergstresser & Philippon (2006) posits that the more company shares the CEO owns, the more incentives there are to keep the stock price overvalued. According to the prior literature of Jensen (2006), this could only be managed by conducting in earnings management.

II.III HYPOTHESIS DEVELOPMENT OR ANALYTICAL FRAMEWORK

As the discussion above shows the hypotheses which are used in this study are:

H0: The degree of overvaluation has no effect on the use of accrued earnings management.

H1: The degree of overvaluation does not affect the use of accrued earnings management.

In addition to this study, in comparison to Badertscher (2011), examines if the relation between overvaluation and earnings management is moderated by the following variables:

H2: As the managerial ownership increases the relationship between overvaluation and earnings management increases.

H3: As the board size, inside board and CEO duality increases the relationship between overvaluation and earnings management increases.

See below the theoretical and practical model of this study.

Figure 1: Theoretical model

Stock valuation

(Cause)

Earnings mangement

(Effect)

Percentage difference stockprice and

Figure 2: Practical model

MODERATOR:

- Ownership

structure;

- Corporate board

Control variable:

- Revenue

III

Research method

III.I TYPE OF RESEARCH

The type of research that will be used in this study is quantitative research. The sources will consist of databases, which are available through the University of Amsterdam.

III.II RESEARCH DESIGN

III.II.I Dependent variable

For the measurement of accrued earnings management this study used the Modified Jones model from Dechow (1995), as follows:

TAt /AVA= α0 + α1 (1 / AVA-1) + α2 ((ΔREVt – ΔRECt) /AVA) + α3 (PPEt / AVA) + εt (1)

The formula above includes the following variables:

• TAt is the total accruals in year t, which is calculated by net income in year t minus the cash flow from operating activities in year t.

• AVA is the average total assets.

• ΔREVt is the change in revenues between years t and t-1. • ΔRECt is the change in receivables between years t and t-1. • PPEt is the level of property, plant, and equipment in year t. • εt is the proxy for the level of discretionary accruals in year t. • α0, α1, α2, and α3 are firm-specific parameters.

Estimates of the firm-specific parameters α0, α1, α2, and α3 are all set to 1. This Because this study focusses on the nonfinancial companies in North-America.

For the measurement of overvaluation (Vt > Bt) this study used the EBO model from Frankel and Lee (1998), as follows:

The formula above includes the following variables: - Vt is the stock's fundamental value at time t. - Bt is the book value at time t.

- ROE is the return on equity. - The cost of equity capital, re

Due to the limitation of available information concerning profit forecasts. There has been decided to discount the Return of Equity (ROE) and Cost of Equity (COE) for the future years. This decision has been made to overcome the information shortcomings. To determine the required amount of discounted for this study, the P/E 10-year ratio is used as guideline.

Usually, the P/E 10-year ratio is applied to broad equity indices (Investopedia, n.d.). The ratio was popularized by Yale University professor Robert Shiller, who won the Nobel Prize in Economic Sciences in 2013. It attracted a great deal of attention after Shiller warned that the frenetic U.S. stock market rally of the late-1990s would turn out to be a bubble. The P/E 10 ratio is also known as the "cyclically adjusted PE (CAPE) ratio" or "Shiller PE ratio."

Since this paper focusses on the history instead of the future, real stock prices can be used to

compare the true overvaluation. The independent variable formula regarding this overvaluation is as follows:

Percentage overvaluation = (StockPrice -/- Vt ) / Vt

This formula makes it clear how much the fundamental stock value differs relatively from the actual stock price.

Book value

Book value per common share is a measure used by owners of common shares in a firm to determine the level of safety associated with each share after all debts are paid accordingly

(Investopedia, 2003a).

Return on Equity (ROE)

Return on Equity is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Investopedia, 2003b).

ROE is expressed as a percentage and calculated as:

Net income is for the full fiscal year (before dividends paid to common stockholders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Cost of Equity

The cost of equity is the return that stockholders require for their investment in a company

(Investopedia, 2012). The traditional formula for cost of equity (AVERAGE_COE) is the dividend capitalization model:

A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership. A company that earns a return on equity more than its cost of equity capital has added value.

III.III.III Control variable

Badertscher et al. (2010) suggest that firms that meet or beat earnings targets (MBE) are more likely to engage in earnings management. Also, research shows that earnings management is related to firm performance and so this study includes revenue as a control variable for earnings management.

III.III.IV Moderators

The moderators that will be used in this thesis are: - Percentage of inside directors;

- People on board of directors; - CEO/Chair duality;

- Percentage of shares owned by CEO.

The moderator variables are measured in the following way: the variables with percentage are measured on a scale of 0-100, this is equal to the percentage-scale. The CEO/Chair duality is measured in 0 or 1. This means that when a CEO also has a position as Chairman, it is measured as a 1, if not, it is measured as a 0. Finally, the people on the board of directors is nominal measured as actual people on the board.

The effect of the moderators on the relationship between overvaluation and accrued earnings management is examined according to a manual published by the University of Twente. The following formulas are calculated in the program SPSS (Statistical Package for Social Sciences):

- Moderator Percentage inside directors = (Percentage of inside directors – mean

Percentage of inside directors) * (Overvaluation – mean Overvaluation)

- Moderator People on the board of directors = (People on the board of directors – mean

People on the board of directors) * (Overvaluation – mean Overvaluation)

- Moderator CEO/Chair duality = (CEO/Chair duality – mean CEO/Chair duality) *

(Overvaluation – mean Overvaluation)

- Moderator Percentage of shares owned by CEO = (Percentage of shares owned by CEO –

III.III SAMPLING METHOD

The initial sample of firms consists of all North-American nonfinancial companies. In this study, this population has been chosen due to the population used by Badertscher (2011). This study builds on the relationship studied by Badertscher (2011) and if another population is used noise might influence the results.

This study requires all firms to have Compustat data available for: - book value in years 2009-2016;

- earnings before extraordinary items and discontinued operations in years 2009-2016; - stock prices and shares outstanding data year-ends from Center for Research in Security

Prices (CRSP) in years 2009-2016;

- Only companies which fiscal year ends on 31e of December; - Percentage of inside directors in years 2009-2016;

- People on board of directors in years 2009-2016; - CEO/Chair duality in years 2009-2016;

- Amount of shares owned by CEO in years 2009-2016.

All these elements are necessary if this study wants to measure all variables adequately. The period 2009 until 2016 is chosen Because this information is available and more reliable than forecast. Forecast of earnings can be inaccurate and subjected to extreme noise. Many different elements which can’t be foreseen can influence the future earnings.

Table 3 shows a flowchart of the sample selection process. The final sample consists of 3.202 observations over a period of 8 years. This sample allows this study to examine whether the

ownership structure and the corporate governance influences the relationship between overvaluation and earnings management.

Sample selection procedures

Sample Number of

observations

Data merging

Database for variable calculation earnings management and partly overvaluation.

Source: Compustat – Fundamentals Annual 2008-2016

75.070

Merging key calculation

Since this paper focusses on multiple years, just the company's specific code will not be sufficient. Therefore this code (gvkey or CUSIP) is combined with the fiscal year.

75.070

TSKEY1:

The first key variable was created by combining gvkey and fyear. This key was essential for the merge of the Compustat databases.

SPSS frequency for gvkey and fyear is 282. These observations were deleted from the dataset.

Duplication analyze for Tskey1 is zero. So no observations were deleted from the dataset.

74.788

TSKEY2

The second key variable was created by combining CUSIP and fyear. This key was necessary to merge with ISS database.

SPSS frequency for CUSIP and fyear is 452. These observations were deleted from the dataset.

Duplication analyze for Tskey2 is zero. So no observations were deleted from the dataset.

74.336

Merging the database for variable calculation partly overvaluation. Source: Compustat - Security Monthly 2008-2016

Databases were merged through the key variable TSKEY1 Data cleaning before merge:

1. Because the only end of year stock prices is required. Variable data date is filtered on 31e of December. However, all dividend payments are summed if their TSKEY1 is similar. By this method, dividend payments throughout the year were not lost.

2. To ensure no duplicates exist in the key variable, Compustat issue ID variable is filtered on one. Through this method, only the first shares issue is included. Because stock prices will not variate between different shares issues. This will not be a problem for the sample.

3. The stock price adjustments (for example stock splits) are already accounted for in the book value per share. This variable divides the issued shares through equity and is used for

calculating the EBO-model.

Unlinked observations were deleted from the merged dataset. Merging the database for the moderators.

Source: ISS - Directors Data Request 2008-2016

Databases were merged through the key variable TSKEY2 Data cleaning before merge:

1. Only the observations with the employment title CEO are kept in the sample. However, the board member per TSKEY2 is counted and inserted in a new variable. Through this method the number of board members is obtainable;

Both files provide observations. Data cleaning will be done later.

29.879

Data cleaning

Drop observations with missing data on total assets, revenue, receivables, and PPE.

21.387

Drop observations with missing or negative data on shares issued and dividend rate

21.190

Drop observations with missing data on directors information. 3.651 Drop observations with data from 2008. This data is initially included

to calculate the mutation in the total asset, revenue, and receivables. This to calculate the earnings management.

3.234

The top 1% cases of the variable dividend rate per year were deleted from the database. This is of the extreme values of these observations

3.202

IV

Results

This chapter discusses the results of this research. Firstly, it discusses the descriptive statistics of each variable used in the multivariate analysis. Secondly, it explains the analyzed correlation and regression. Finally, it states if the hypotheses are either supported or not supported by the data. All research was performed in the program SPSS (Statistical Package for Social Sciences). The scatter plots are presented in the Appendix A – Scatterplot and Histogram.

IV.I DESCRIPTIVE STATISTICS

Table 4 documents the descriptive statistics of each variable used in the multivariate analysis. These descriptive statistics include the mean, median, standard deviation, number of observations, Q1 and Q3. It should be noted that the variable Duality CEO and Chairman is a dummy variable. This variable can only have the value of one or zero. Besides the dummy variable, it is immediately noticeable is that all variables contain the same number of observations. This similarity is due to the data cleaning process, which was explained in the sampling method paragraph. Overall, the

descriptive statistics are similar to those documented in prior research.

Table 4

Descriptive Statistics - independent, dependent, moderator and control variables

Obs. Q1 Mean Median Q3 Std. Dev.

Accrual-based earnings management 3.202 0,536 0,541 0,426 0,547 0.453 Overvaluation 3.202 0,992 1,142 0,489 1,129 12,557 Number of board members 3.202 9,460 9,490 9,000 9,520 2,197 Percentage inside directors 3.202 0,145 0,146 0,114 0,147 0,075

Duality CEO and Chairman

3.202 0,530 0,530 1,000 0,540 0,499

Shares owned by CEO 3.202 1.779.310 1.847.367 624.894 1.915.428 5.079.157 Revenue 3.202 9.579,790 9.889,770 2.417,460 10.199,75 26.002,525

This table presents descriptive statistics for the variables accrual-based earnings management, overvaluation, number of board members, percentage inside directors, duality CEO and Chairman, shares owned by CEO, and revenue. The sample which has been used for generating these

descriptive statistics are stated in table 3. Data is collected from SPSS.

IV.II CORRELATION

Before performing regressions, the data has to be analyzed. The correlation matrix of all relevant variables will be discussed to explore significant linear and monotonic relationships between variables. A linear correlation table is shown in table 5. This table shows a Pearson correlation matrix. The Pearson correlation evaluates the linear relationship between two continuous variables. A relationship is linear when a change in one variable is associated with a proportional change in the other variable. The formulas return a value between -1 and 1, where:

- a correlation coefficient of 1 means that for every positive increase of 1 in one variable, there is a positive increase of 1 in the other;

- a correlation coefficient of -1 means that for every positive increase of 1 in one variable, there is a negative decrease of 1 in the other;

- zero means that for every increase, there isn’t a positive or negative increase. The two just aren’t related.

Besides the Pearson correlation matrix, there’s also the Spearman correlation matrix. The Spearman correlation evaluates the monotonic relationship between two continuous or ordinal variables. In a monotonic relationship, the variables tend to change together, but not necessarily at a constant rate. The Spearman correlation coefficient is based on the ranked values for each variable rather than the raw data (Minitab, n.d.). However, in this paper, there has been chosen for the Pearson correlation matrix. This decision originates from the hypotheses of this study, which assumes that there’s a linear relationship between the variables. Besides that, the difference is that the Pearson is most appropriate for measurements taken from an interval scale, while the Spearman is more appropriate for measurements taken from ordinal scales. Moreover, this paper solely uses interval scales.

Examples of interval scales include "temperature in Fahrenheit" and "length in inches", in which the individual units are meaningful. Things like "satisfaction scores" tend to of the ordinal type since while it is clear that "5 happiness" is happier than "3 happiness", it is not clear whether you could give a meaningful interpretation of "1 unit of happiness".

Table 5

Correlation Pearson (linear)

This table provides the Spearman correlation coefficients for the main variables in the main tests. Each cruising row and column have a p-value. Significant correlations at the 0.05 level are

indicated with one * (2-tailed), and significant correlations at the 0.01 level are indicated with two * (2-tailed). All variables are calculated as defined in chapter III.

The correlation matrix shows that revenue (r = .035, p < 0,05), number of board members

(NrBoard) (r = .038, p < 0.05), duality CEO and board chairman (CEO_Chair) (r = .040, p < 0,05) and overvaluation (StockPriceEBO) (r = .048, p < 0.01) are positively correlated with the proxy of earnings management. These positive correlations corresponds with prior researches.

The correlation between shares owned by the CEO (r = .001, p = .962) and accrued earnings management is respectively positive correlated. The last correlation of accrued earnings

management is with percentage inside directors (P_inside) (r = -.026, p = .137) and is respectively negative correlated. Both of these relations differ from prior literature. However, it should be noted that the correlation is too weak to suggest a relationship. The reason for this might lies in the significant reduction of original sample size. After the sample selection procedure only 4,3 percent remained. This recommendation has been added to the limitation paragraph.

Hypothesis 1

Based on the correlation matrix in table 5, there could be an answer given on hypothesis 1. There is a significant positive correlation (r = .048, p < 0.01) between overvaluation and accrued earnings management. In summary, hypothesis 1 is supported by the data. This result is in line with findings from the study of Badertscher (2011).

IV.III REGRESSION

After discussing the descriptive statistics and correlation matrix, in this paragraph, the strength of the models and the results of the regression will be interpreted. Two models were tested. The first model with one predictor, overvaluation. This model is to correspond with the study of Badertscher (2011). The second model is an expansion of the first model. Four predictors are added, so-called moderators, to test their effects on the relationship of overvaluation with accrued earnings

management.

Hypothesis 2 & 3

This paragraph contains the results of the hypotheses 2 and 3. Hypothesis 2 examined the effect of managerial ownership on the relationship between overvaluation and accrued earnings

management. Hypothesis 3 examined the effect of board size, inside board and CEO duality on the relationship between overvaluation and accrued earnings management.

According to table 6, the first model shows relationship with accrued earnings management (R2 = .002, F = 7,022, p < .01). The second model included the moderator’s variables, and all of them have a significant relationship with the relationship between accrued earnings management and overvaluation (R2 = .003, F = 2,379, p < .01). The SPSS output is added in Appendix B – Accrued Earnings Management.

Table 6

Regression Accruals-Based Earnings Management

Variable Model 1 Model 2

B Sig. B Sig. Constant 0,540 0,008 0,539 0,008 Overvaluation 0,002 0,001** 0,002 0,001** Number of board members -0,009 0,008** Percentage inside directors 0,004 0,011*

Duality CEO and Chairman

-0,009 0,010**

Shares owned by CEO 0,022 0,011*

R Square 0,002 0,003

F-stat 7,022 0,008** 2,379 0,006**

N 3.202 3.202

a. Dependent Variable: Accruals-based earnings management * Significant at the 5% level

** Significant at the 1% level

This table presents models investigating factors associated with the change in the relationship between accrual-based earnings management and overvaluation. The B factor indicates the effect on the relationship which can variate form zero to one. Finally the Sig. indicates if there’s a significant effect. If this is above 0.05, no effects can be recognized.

In table 6, some are effects visible. The main independent variable overvaluation has a significant positive effect on accrued earnings management (b = .002, p < 0.01). The moderator variables, number of board members (b = -.009, p < 0.01), percentage inside directors (b = .004, p < 0.01), duality CEO and chairman (b = .004, p <0,05) and shares owned by CEO (b = .022, p < 0,05), have an significant effect on the relationship between accrued earnings management and overvaluation. However, it is important to notice that the moderator’s number of board member and duality CEO and chairman have a significant negative regression with the relationship between overvaluation and accrued earnings management. In short, this means that when these variables increase the relationship strength between overvaluation and accrued earnings management decreases. Finally,

the other moderators have a significant positive regression with the relationship between

overvaluation and accruals-based earnings management. This finding means that the relationship strength increases when these moderators increase.

Based on the regression in table 6, there could be an answer given to hypothesis 2 and 3. Firstly, there is a significant positive effect of ownership structure (b = .022, p < 0,05) on the relationship between overvaluation and accrued earnings management. In summary, hypothesis 2 is supported by the data. This result is in line with findings from the prior literature. Secondly, the different variables of corporate governance do not correspond in their effect on the relationship between overvaluation and accrued earnings management. Because of this finding, we can conclude that hypothesis 3 is not supported by the data. This result is not in line with findings from the prior literature.

V Conclusion

V.I DISCUSSION

In this last chapter, this paper starts with a summary of this thesis, followed by the conclusion, some limitations of this study, and suggest some ideas for future research.

This study examined the influence of corporate boards and ownership structures on the relation between overvaluation and earnings management. Specifically, this study predicts that the worse the corporate boards and the ownership structures are, the more likely it is that the firm will engage in earnings management. In summary, this study investigates how the corporate boards and ownership structures affect the relation between overvaluation and accrual earnings management and sheds light on how the company is designed to sustain overvaluation.

The type of research that is used in this study is quantitative research. The sources consisted of databases, which are available through the University of Amsterdam. The initial sample of firms consists of all North-American nonfinancial companies for the years 2009 until 2016. In this study, this population has been chosen due to the population used by Badertscher (2011). This study builds on the relationship studied by Badertscher (2011) and if another population is used noise might influence the results.

The cross-sectional modified Jones Model (Jones, 1991) is used for the calculation of the discretionary accruals to measure accruals-based earnings management. For the calculation of overvaluation, the percentage difference between the real stock market price and the EBO model is used. The other variables are directly subtracted from databases.

According to prior literature, overvaluation and accrued earnings management are seen as

substitutes of each other. As illustrated in the correlation table in paragraph IV – correlation – there is evidence to support Hypothesis 1 which claims that the two variables significant positive

Based on the regression in table 6, there could be an answer given to hypothesis 2 and 3. Firstly, there is a significant positive effect of ownership structure on the relationship between

overvaluation and accrued earnings management. In summary, hypothesis 2 is supported by the data. This result is in line with findings from the prior literature. Secondly, the different variables of corporate governance do not correspond in their effect on the relationship between overvaluation and accrued earnings management. Because of this finding, we can conclude that hypothesis 3 is not supported by the data. This result is not in line with findings from the prior literature.

Finally, to answer the research question: The influence of corporate boards and ownership

structures on the relation between overvaluation and earnings management?

The paper shows there is some significant result that supports the influence of corporate boards and ownership structures on the relation between overvaluation and earnings management. Concluding from this thesis, I can say that the ownership structures influences the relationship between

overvaluation and earnings management.

V.II FUTURE RESEARCH

Since there is no significant positive relationship found with any of the corporate governance variables on the relationship between overvaluation and accruals-based earnings management. Recommendations for future research lies in the fact only 4.3 percent remained after the sample selection procedures, see table 3. If future research is required more efficient data gathering and sample selection procedures should be set-up. Through this method, there might be more results in line with the prior literature. Finally, more variables of ownership structures and corporate

VI Bibliography

American Management Association, 1999. corporate governance defined. Corp. Gov.

Anderson, E.W., Ghysels, E., Juergens, J.L., 2005. Do heterogeneous beliefs matter for asset pricing? Rev. Financ. Stud. 18, 875–924.

Andreou, P.C., Antoniou, C., Horton, J., Louca, C., 2016. Corporate Governance and Firm-specific Stock Price Crashes. Eur. Financ. Manag. 22, 916–956.

ASX Corporate Governance Council, 2007. Corporate governance principles and recommendations. ASX Corporate Governance Council Sydney.

Badertscher, B.A., 2011. Overvaluation and the choice of alternative earnings management mechanisms. Account. Rev. 86, 1491–1518.

Baker, H.K., Anderson, R., 2010. Corporate governance: A synthesis of theory, research, and practice. John Wiley & Sons.

Barton, J., Waymire, G., 2004. Investor protection under unregulated financial reporting. J. Account. Econ. 38, 65–116.

Bergstresser, D., Philippon, T., 2006. CEO incentives and earnings management. J. Financ. Econ. 80, 511–529.

Blair, M.M., 1995. Rethinking Assumptions Behind Corporate Governance. Chall. 05775132 38, 12–17.

Cheng, S., 2008. Board size and the variability of corporate performance. J. Financ. Econ. 87, 157– 176. https://doi.org/10.1016/j.jfineco.2006.10.006

Davis, R.B., 2002. The Bonding Effects of Directors’ Statutory Wage Liability: An Interactive Corporate Governance Explanation. Law Policy 24, 403.

Dechow, P.M., 1994. Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. J. Account. Econ. 18, 3–42.

Dechow, P.M., Richardson, S.A., Tuna, A., 2000. Are benchmark beaters doing anything wrong? Dechow, P.M., Sloan, R.G., Sweeney, A.P., 1995. Detecting earnings management. Account. Rev.

193–225.

Edwards, E.O., Bell, P.W., 1965. The theory and measurement of business income. Univ of California Press.

Frankel, R., Lee, C.M., 1998. Accounting valuation, market expectation, and cross-sectional stock returns. J. Account. Econ. 25, 283–319.

Ghosh, A., Marra, A., Moon, D., 2010. Corporate boards, audit committees, and earnings management: pre-and post-SOX evidence. J. Bus. Finance Account. 37, 1145–1176.

HAMZA, T., MSELMI, N., 2017. Corporate Governance and Equity Prices: The Effect of Board of Directors and Audit Committee Independence. Manag. Int. Manag. Int. 21.

Huang, H.-H., Chan, M.-L., Chang, C.-H., Wong, J.-L., 2012. Is corporate governance related to the conservatism in management earnings forecasts? Emerg. Mark. Finance Trade 48, 105–121. International Chamber of Commerce, 1999. corporate governance defined. Corp. Gov.

Investopedia, 2012. Cost Of Equity - COE [WWW Document]. Investopedia. URL https://www.investopedia.com/walkthrough/corporate-finance/5/cost-capital/cost-equity.aspx (accessed 11.14.17).

Investopedia, 2003a. Book Value Per Common Share [WWW Document]. Investopedia. URL https://www.investopedia.com/terms/b/bookvaluepercommon.asp (accessed 12.7.17). Investopedia, 2003b. Return On Equity - ROE [WWW Document]. Investopedia. URL

https://www.investopedia.com/terms/r/returnonequity.asp (accessed 11.14.17). Investopedia, 2003c. Book Value [WWW Document]. Investopedia. URL

https://www.investopedia.com/terms/b/bookvalue.asp (accessed 12.1.17).

Investopedia, n.d. Profit With The Power Of Price-To-Earnings [WWW Document]. URL https://www.investopedia.com/articles/basics/10/profit-with-pe-power.asp (accessed 12.13.17).

Jensen, M.C., 2005. Agency costs of overvalued equity. Financ. Manag. 34, 5–19. Johnson, L.T., 2005. Relevance and reliability. FASB Rep. 2.

Keasey, K., Thompson, S., Wright, M., 2005. Corporate governance: accountability, enterprise and international comparisons. John Wiley & Sons.

Kummamuru, V., 2016. Corporate Governance: A Cybernetic View. IUP J. Corp. Gov. 15, 59. Liu, N.-C., Chen, M.-Y., Wang, M.-L., 2016. The Effects of Non-Expensed Employee Stock Bonus

on Firm Performance: Evidence from Taiwanese High-Tech Firms. Br. J. Ind. Relat. 54, 30– 54.

McGregor, L., 2000. The human face of corporate governance. Palgrave.

Minitab, n.d. A comparison of the Pearson and Spearman correlation methods [WWW Document]. URL http://support.minitab.com/en-us/minitab-express/1/help-and-how-to/modeling- statistics/regression/supporting-topics/basics/a-comparison-of-the-pearson-and-spearman-correlation-methods/ (accessed 12.21.17).

Moeller, S.B., Schlingemann, F.P., Stulz, R.M., 2004. Firm size and the gains from acquisitions. J. Financ. Econ. 73, 201–228.

Myers, J.N., Myers, L.A., Skinner, D.J., 2007. Earnings momentum and earnings management. J. Account. Audit. Finance 22, 249–284.

Nelson, M.W., Elliott, J.A., Tarpley, R.L., 2002. Evidence from auditors about managers’ and auditors’ earnings management decisions. Account. Rev. 77, 175–202.

Ohlson, J.A., 1995. Earnings, book values, and dividends in equity valuation. Contemp. Account. Res. 11, 661–687.

Shleifer, A., Vishny, R.W., 1997. A survey of corporate governance. J. Finance 52, 737–783. Siregar, S.V., Utama, S., 2008. Type of earnings management and the effect of ownership structure,

firm size, and corporate-governance practices: Evidence from Indonesia. Int. J. Account. 43, 1–27.

Sloan, R.G., 2005. Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? Account. Rev. 71, 289–315.

The Corporate Governance Forum of Japan, 1999. corporate governance defined. Corp. Gov. Travlos, N.G., 1987. Corporate takeover bids, methods of payment, and bidding firms’ stock

returns. J. Finance 42, 943–963.

Zang, A.Y., 2011. Evidence on the trade-off between real activities manipulation and accrual-based earnings management. Account. Rev. 87, 675–703.

Appendix A

A1 – Accrued Earnings Management

Graph A1.2: Histrogram Accrued Earnings Management

Appendix B

Table B.2: Regression, Model Summary Accrued Earnings Management