Type of earnings management against managerial entrenchment and corporate governance mechanisms

Abstract

The purpose of this research is to determine the type of earnings management in Canadian firms. To do this, we studied the effect of discretionary accruals, proxy of earnings management, on the future profitability of the firm. In addition, we studied the effect of entrenchment and governance mechanisms namely the board independence, the audit committee existence and the audit quality on the type of earnings management. Our study was based on a sample of 113 Canadian firms listed on the Toronto stock exchange. Using multiple regressions, we found that the type of earnings management chosen by Canadian firms result tends towards efficiency, and that the effect of discretionary accruals on future profitability is moderated only by the manager's entrenchment and the audit quality.