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The relationship between external financing activities and earnings management: Evidence from enterprise risk management

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  • Wang, Teng-Shih
  • Lin, Yi-Mien
  • Werner, Edward M.
  • Chang, Hsihui

Abstract

This study examines the impact of external financing activities on earnings management decisions and further explores the role of enterprise risk management (ERM) as a potential moderating factor in this association. We find that managers use both real-activities and accrual-based earnings management when engaging in equity financing activities. Moreover, when firms have weaker ERM systems, we find that managers are less likely to use real-activities earnings management in their equity financing efforts. Therefore, our policy-relevant findings suggest that weaker ERM systems can signal poor control mechanisms and attract additional investor scrutiny, thus constraining managers' use of real-activities earnings manipulation to harm long-term firm value.

Suggested Citation

  • Wang, Teng-Shih & Lin, Yi-Mien & Werner, Edward M. & Chang, Hsihui, 2018. "The relationship between external financing activities and earnings management: Evidence from enterprise risk management," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 312-329.
    • Handle: RePEc:eee:reveco:v:58:y:2018:i:c:p:312-329
    DOI: 10.1016/j.iref.2018.04.003
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    More about this item

    Keywords

    Enterprise risk management; External financing activities; Accrual-based earnings management; Real activities earnings management; Corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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