Impact of earnings management on agency costs: evidence from MILA markets
ISSN: 1746-5265
Article publication date: 21 January 2021
Issue publication date: 10 March 2021
Abstract
Purpose
The purpose of this article is to analyze the effects of accruals-based earnings management (AEM), International Financial Reporting Standard (IFRS) adoption and stock market integration for firms that belong to Latin-American Integrated Market (MILA).
Design/methodology/approach
The GMM estimator was used according to Arellano and Bover (1995) for panel data on a sample of 478 non-financial companies between 2000 and 2016. Multilevel mixed models was used for the robustness analysis.
Findings
AEM practices significantly and dynamically reduce agency costs. This result suggests companies use positive discretionary accruals to hide true agency costs and avoid shareholders monitoring, while negative discretionary accruals are ways to expropriate wealth and increase agency costs. This result implies that firms use AEM as a predetermined strategy to weaken corporate governance. The IFRS adoption and MILA implementation reduced agency costs. However, only IFRS adoption had the capability to mitigate the effects of AEM on agency costs.
Originality/value
These results reveal AEM constitutes a practice that managers use to weaken firms’ corporate governance and expropriate wealth from shareholders. These practices have effects at short-run and long-run. However, the IFRS adoption and market integration represented by MILA are mitigating factors for agency costs. These results have relevant implications for firms’ corporate governance because they guide investors and shareholders to strengthen corporate control and monitoring on business decision-making. These results also are relevant to policymakers because they orient the financial policies design to strengthen the benefits of IFRS and MILA.
Keywords
Acknowledgements
The authors thank the Universidad de Concepción for funding this research. The authors also appreciate the comments of the anonymous referees, which allowed us to improve this article.
Citation
Muñoz Mendoza, J.A., Veloso Ramos, C.L., Sepúlveda Yelpo, S.M., Delgado Fuentealba, C.L. and Fuentes-Solís, R.A. (2021), "Impact of earnings management on agency costs: evidence from MILA markets", Baltic Journal of Management, Vol. 16 No. 2, pp. 247-275. https://doi.org/10.1108/BJM-04-2020-0112
Publisher
:Emerald Publishing Limited
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