The purpose of this paper is to find out whether governance mechanisms approximated by the board of directors' characteristics, auditors' quality, ownership structure and…
The purpose of this paper is to find out whether governance mechanisms approximated by the board of directors' characteristics, auditors' quality, ownership structure and compensation mix, can help bridge the gap between economic value added (EVA) and market values approximated by created shareholder value (CSV).
Based on a sample of US firms and using available data for EVA, discriminant analysis and stepwise regression are used to test whether governance characteristics explain the differences between the results provided by the two measures of performance.
The results show that governance characteristics are important in explaining the differences between the results provided by CSV and EVA and that board independence, the auditors' expertise and reputation, the ownership structure and the stock‐options contribute significantly in explaining these differences.
The results are very relevant to academicians and practitioners concerned with performance measurement. They basically underline the importance of including governance characteristics in any evaluation formula.
The purpose of this paper is to find out whether corporate diversification provides a favourable environment for earnings management (agency conflicts hypothesis) or whether it mitigates this phenomenon (earnings volatility hypothesis).
Based on a sample of US firms and making an explicit distinction between industrial and geographic diversification, univariate and multivariate analyses are used to test whether firm diversification has an impact on earnings management.
Results show that the average diversified firm in the sample has somewhat more earnings management problems than a similarly constructed portfolio of stand‐alone firms chosen to approximate the segments of the conglomerate. Consistent with the agency conflicts hypothesis, the authors find that geographic diversification increases earnings management whereas industrial diversification decreases it, consistent with earnings volatility hypothesis. Moreover, industrial and geographic diversification combined reinforce this phenomenon. These findings are consistent with the view that the costs of geographic diversification outweigh the benefits.
The paper makes an important contribution to the accounting literature by providing new and significantly different evidence on the relative roles of corporate diversification in the earnings management. By linking two streams of research, earnings management and corporate diversification, one is taken into the unexplored area of the sources of the difference in earnings management between diversified and focussed firms. More specifically, this study provides evidence that earnings management is more intensively practiced in geographically diversified firms and even more so in firms that are both industrially and geographically diversified.