Internal Governance Of Key Subordinate Executives And Real Earnings Management

Accounting information is the cornerstone of capital market operation,and with the development of our capital market,the quality of accounting information has been paid more and more attention.On the one hand,the quality of accounting information is related to the decision of stakeholders;on the other hand,rational allocation of social resources requires higher quality of accounting information.However,Because of asymmetric information between the management and other stakeholders,the management has access to earnings management to meet earnings benchmarks.With the increasing attention of regulators and auditors,and limited space to manipulate of accrual-based earnings management,firms tend to adopt real activities manipulation for its means of concealment.Most prior studies tend to focus on the dominant system such as board of directors,board of supervisors and the audit committee,test whether the size of the board of directors,the remuneration of directors,the proportion of independent directors,the size of the board of supervisors or the number of meetings of the audit committee can constrain the extent of real earnings management.Previous studies have shown that CEO has the motivation of earnings management based on individual compensation,stock-based incentive compensation and top management turnover(Bergstresser and Philippon,2006)and the more powerful the CEOs possess more power to conduct real earnings management.For historical or practical reasons,CEO in Chinese enterprises have too much power(Zhou,2014),as a result,it will bring a series of agency problems and damage the interests of shareholders.The recent papers find that key subordinate executives provide checks and balances in the organization and affect corporate decisions and operating cash flows,as a result,affect the extent of real earnings management(Cheng et al.2016).We argue that real earnings management is not decided by the sole manager but shared by all top executives which called key executives in the team.Different from accrual-based earnings management,real earnings management need all top executives to support,other than decided solely by CEO or CFO.Therefore,we can study whether key subordinate executives has constrained the extent of real earnings management.The reason why this paper brings real earnings management other than accrual-based earnings management into the research field is because of two aspects,on the one hand,the hidden characteristics of real earnings management make it more and more popular with management team,and the real earnings management will damage the long-term value of the enterprise;on the other hand,accrual-based earnings management emphasizes the coordination of CFO,for example,CFO plays a decisive role in the selection and adjustment of accounting policies(Mankovsky,2001),the impact of CFO on accrual-based earnings management is independent(Geiger and North,2006;Graham et al.,2004;Mao and Shen,2009),accrual-based earnings management is more determined by the CEO and the CFO than the entire management team(Jiang et al.,2013)?Therefore,this paper focuses on the relationship between the internal governance of key subordinate executive and real earnings management,and also test whether the internal governance of key subordinate executive can affect the extent of real earnings management.This paper based on the perspective of checks balances in the organization and A-share listed companies of China from 2008 to 2009 to analyze how the internal governance of key subordinate executives affects the extent of real earnings management.The empirical results are as follows(1)The internal governance of key subordinate executives can constrain the extent of real earnings management.As far as the summary measure RM,the internal governance of key subordinate executives can constrain the extent of real earnings management;as far as the three individual measures RM_CFO,RM_PROD and RM_DISX,the internal governance of key subordinate executives can constrain RM_PROD,but lose constrain of RM_CFO and RM_DISX.(2)The association between internal governance of key subordinate executives and the extent of real earnings management is significantly more negative for the state-owned enterprises group.The regression coefficient is-0.071,with statistical significance at the 0.10 level;while the regression coefficient in state-owned enterprises group is-0.116,with statistical significance at the 0.01 level,which indicates the constrain is both in state-owned and non-state-owned enterprises groups,but is stronger in non-state-owned enterprises group.(3)Subordinate executives' heterogeneity doesn't play the moderating role in the relationship between internal governance of key subordinate executives and the extent of real earnings management.The cross-multiplying terms of the internal governance of key subordinate executives and the TMT age heterogeneity,the level of education heterogeneity or the level of tenure heterogeneity is not significantly negatively associated with the extent of real earnings management.The TMT heterogeneity is not adjusting variable.