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Voting with hands, earnings management and corporate governance

Ting Li (Department of Management and Business, Skidmore College, Saratoga Springs, New York, USA)
Xinlei Zhao (Department of Accounting, College of Business and Innovation, University of Toledo, Toledo, Ohio, USA)
Aiwu Zhao (Department of Management and Business, Skidmore College, Saratoga Springs, New York, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 14 May 2019

Issue publication date: 16 May 2019




Motivated by managers’ intentions to pursue private interests by engaging in earnings management, this paper aims to investigate whether voting with hands (shareholders cast votes on shareholder proposals) by shareholders acts as an external disciplining mechanism over earnings management relative to corporate governance. Also, as corporate governance can scrutinize managers’ behavior, this study also examines whether there is a substitutive relation between shareholder proposals and corporate governance mechanism.


First, this paper uses ordinary least squares (OLS) regressions of discrepancy accruals on the percentage of “For” votes for shareholder proposals to test the incremental effect of shareholder proposals on earnings management. Second, firms receiving shareholder proposals are matched with those not receiving proposals by propensity scores, and the levels of earnings management and corporate governance between these two groups are compared by univariate analysis and OLS regressions. In addition, six portfolios are created based on whether firms receive shareholder proposals, as well as on the levels of corporate governance, to assess whether external control from shareholder proposals can substitute internal control for corporate governance in disciplining earnings management. Regressions of earnings management on corporate governance (shareholder proposals) are conducted in the sub-samples formed on shareholder proposals (corporate governance) to further explore the above substitution effects.


Based on a sample of 2,041 firm-year observations from 2001 to 2010, this paper finds that the “For” votes received from the shareholder proposals have a significant negative relationship with the practice of earnings management, even when corporate governance is controlled. The negative relationship between shareholder proposal and magnitude of earnings management is also found to be stronger when firms have weak corporate governance. The overall evidence suggests that the external control from “voting-with-hand” shareholders has a significant impact on earnings management. In addition, shareholder proposals can substitute the monitoring mechanism for corporate governance in constraining managers’ myopic behavior.


This paper contributes to the extant literature by using the percentage of “For” votes for shareholder proposals as a proxy for shareholder pressure and concerns. This study contributes to the earnings management literature by showing the disciplinary effect of outside shareholders on managers’ reporting behavior. Also, it contributes to the corporate governance research by presenting that shareholder proposals can substitute for the internal control of corporate governance in decreasing earnings management. This paper should be of interest to investors and standard setters.



Li, T., Zhao, X. and Zhao, A. (2019), "Voting with hands, earnings management and corporate governance", Review of Accounting and Finance, Vol. 18 No. 2, pp. 178-197.



Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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