Real Earnings Management and Subsequent Accounting Performance: The Moderating Role of Corporate Governance

Prior studies suggest that there are two motivations for managers' real earnings management, i.e., opportunism versus non-opportunism hypotheses. In light of the findings, this study argues that the two types of real activity earnings management can affect future accounting performance differently. Using unbalanced-panel data, this study examines the moderating role of corporate governance in managerial real earnings management and attempts to address the conflicting evidence about the effect of such behavior on subsequent accounting performance. The result shows that, on average, real earnings management is negatively associated with subsequent accounting performance, supporting the opportunism hypothesis. However, firms with better corporate governance can mitigate this negative relationship and generate higher future accounting performance. In other words, managers of firms with better corporate governance cautiously consider the tradeoffs between the costs and benefits of real earnings management to ensure that the decision would not sacrifice long-term performance, which is in line with the non-opportunistic motivation of real earnings management for firms with better corporate governance. Further analyses show the findings are more pronounced after the PROCOMP scandal.