The effect of corporate governance on earnings management around UK rights issues

Abstract

Purpose

This paper aims to investigate the relation between corporate governance and earnings management around UK rights issues.

Design/methodology/approach

The paper examines the effect of board structure, ownership structure, adviser structure, and capital structure on discretionary current accruals – a proxy for earnings management – for a sample of size‐controlled rights issuers. Rights issues are chosen as a context in which firms have particular incentives to manage earnings.

Findings

The results suggest that firms with higher debt to equity ratios, with lower proportions of non‐executive directors, or with no large block owner, are more likely to use discretionary current accruals to manipulate earnings around rights issues.

Research limitations/implications

Similar research can be conducted around other equity issuing methods such as open offers and around other major corporate events such as initial public offerings.

Practical implications

The paper's evidence contributes to an understanding of corporate governance and has practical implications for stakeholders. It suggests that investors can rely more on the financial disclosures of firms with lower debt to equity ratios, higher proportions of outside directors, and with a large blockholder. Regulators may propose that firms undertaking corporate events such as equity offerings should follow best corporate governance practices to enhance investor confidence.

Originality/value

This study is the first to investigate the corporate governance mechanisms in place to check opportunistic earnings management around specific corporate events for the UK market.

Citation

Iqbal, A. and Strong, N. (2010), "The effect of corporate governance on earnings management around UK rights issues", International Journal of Managerial Finance, Vol. 6 No. 3, pp. 168-189. https://doi.org/10.1108/17439131011056215