Delaware Incorporation and Earnings Management: An Empirical Analysis

Abstract

Motivated by agency theory, this study examines whether the extent of earnings management significantly differs in firms incorporated in Delaware versus those incorporated elsewhere in the U.S. Delaware corporate law has been argued to affect agency costs. To the extent that shareholders make poor investment decisions based on managed accounting numbers, earnings management can be regarded as an agency cost. The evidence indicates that earnings management occurs to a lesser extent in Delaware firms. In addition, Delaware incorporation combined with a predominance of outside independent directors on the board, further constrains earnings management. Finally, the results suggest that earnings management is not diminished in Delaware firms that are controlled by founding families.