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Managers’ discretionary behavior, earnings management and corporate governance: An empirical international analysis*

In the present debate about corporate governance, the role played by boards of directors has become more and more relevant. Facing important incentives problems due to the separation between ownership and control, the board of directors is supposed to act, on behalf of the shareholders, as an important mechanism to monitor managers’ discretionary behavior. Among the several ways to measure discretionarity, we have focused on that one stemming from accrual decisions in order to manage earnings. The innovation of our paper relies on the use of accruals and earnings management as a measure of discretionary behavior. Accruals are understood as some means to manipulate financial statements for the sake of managers’ profit. Although, accruals are not the only instrument the managers have for earnings management, there are some characteristics of them justifying the increasing importance accruals are being given in earnings management. Based on these issues, the aim of our paper is to test the board of directors ability to monitor by using the discretionary component of earnings management as an indicator of managers’ discretionarity. Using a sample of 450 non-financial companies from 10 OECD countries, we have found empirical evidence showing the link between some board of directors features and the discretionary financial statements manipulation by managers. Specifically, and as most of the literature has pointed, our main result stresses the positive and robust impact of board size on earnings management. As far as other characteristics of boards of directors are concerned, our research does not lend conclusive support to the effect of board composition or meeting frequency on earnings management.