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Ethical Management, Corporate Governance, and Abnormal Accruals

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Abstract

Recent research has linked the reduction of abnormal accruals to corporate governance metrics. The results of these studies, however, are based on samples taken from periods prior to promulgated board independence requirements. In other words, during this time period, management not only had discretion over accounting accruals, but also significant influence over the choice of membership on the board of directors. This study suggests that ethical management practices may be a correlated omitted variable in these studies, thus resulting in causal inference problems in the previous research. We argue that, rather than the board of directors monitoring and reducing abnormal accruals as has been posited, management who was not engaging in abusive earnings management was attempting to signal the market regarding the quality of the firm’s financial information through its choice of board membership.

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Acknowledgements

The authors would like to thank the workshop participants at Louisiana State University and the 2005 Ethics Symposium at the American Accounting Association Annual Meeting for their helpful comments.

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Authors and Affiliations

  1. Department of Accountancy and Graduate Institute of Finance and Banking, National Cheng Kung University, Tainan 701, Taiwan

    Pinghsun Huang

  2. School of Accounting, College of Business, James Madison University, Harrisonburg, VA, 22807, USA

    Timothy J. Louwers

  3. Department of Accounting, E.J. Ourso College of Business, Louisiana State University, 3101 PF Taylor Hall, Baton Rouge, LA, 70803, USA

    Jacquelyn Sue Moffitt

  4. School of Management, State University of New York at Binghamton, Binghamton, NY, 13902-6000, USA

    Yan Zhang

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  1. Pinghsun Huang
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  2. Timothy J. Louwers
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  3. Jacquelyn Sue Moffitt
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  4. Yan Zhang
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Correspondence to Jacquelyn Sue Moffitt.

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Huang, P., Louwers, T.J., Moffitt, J.S. et al. Ethical Management, Corporate Governance, and Abnormal Accruals. J Bus Ethics 83, 469–487 (2008). https://doi.org/10.1007/s10551-007-9632-9

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  • DOI: https://doi.org/10.1007/s10551-007-9632-9

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