Evaluation of Risk as Conducive Environment for Earning Manipulation and Moderation Effect of Corporate Governance: Empirical Study of Listed Indian Firms

Abstract

Separation of decision-making and risk-bearing functions in dispersed ownership structures offer scope for opportunistic behaviour of managers. Hence necessitate proactive governing mechanism for ratification and monitoring of decisions from the initiation and implementation of the decisions for protection of shareholders as well as stake holders interest. The motive of this paper is to evaluate whether risky behaviour provide conducive environment for earning manipulation and analyze the moderating effect of corporate governance (CG) and ownership attributes in reducing earnings management practices in high risk conditions. A structural Partial least square (PLS) equations model was developed to analyze the relationship and CG constructs moderating role was evaluated. Based on a sample of 270 listed Indian firms in NSE during the period of 9 years from 2007–2008 to 2015–2016 using smart-PLS, it was detected that market risk, financing and investing risk manifold opportunities of managers to maximise their own benefits by manipulating the information in their discretion (discretionary accruals measured through modified Jones Model). CG mechanism constructs like audit, risk and compensation committees, board activities, board characteristics, transparency have been found significant in moderating the relationship between risk and earning management while board composition and ownership structure have failed to restrain the opportunistic behaviour of managers in favourable risky environment contradicting acceptance of efficient monitoring hypothesis and resource based view in India corporate setting.