Managerial Power And Earnings Quality

Recently, financial fraud has gained much attention than before, especially afterEnron’s breakdown for its fraud behavior, which directly caused the implement ofSarbanes－Oxley Act and dragged Andersen down. The ke y problem is thatmanagements in organizations with dispersed shareholdings tend to be more powerfulthan that in others. Moreover, Managements with professional skills play a leadingrole in cooperate operation, and there are chances that they may affect the quality ofearnings by abusing their power. As a vital exterior governance mechanism, productmarket competition can restrain the power of managements to prevent them fromseeking personal gains.The relationships of managerial power and its five dimensions with the earningsquality were examined based on the3117firm years through2007to2011. Meantime,we examined the impact of product market competition on managerialpower----earnings quality sensitivity. The results of the empirical test showed thatearnings quality is significant positively related to managerial power，the same withthe CEO tenure, CEO share, independence of the board. No significant relationship isfound between earnings quality and either CEO education background or CEO duality.Besides, we find out that product market competition has certain impact on themanagerial power----earnings quality sensitivity.We reached the conclusion that powerful managements may not be responsiblefor the low earnings quality in listed companies. On the contrary，they may pose morepositive influence on the quality of earnings, especially in a more competitivesituation. The results also demonstrate that competition in product market is necessaryin the incentive mechanism effectiveness and thus provide certain solutions incooperate governance.