Article2021

Impact of earnings management on agency costs: evidence from MILA markets

Jorge Andrés Muñoz Mendoza · Carmen L. Veloso Ramos · Sandra María Sepúlveda Yelpo · Carlos Leandro Delgado Fuentealba · J. Rodrigo Fuentes

27 citations0/0 files storedBaltic Journal of Management

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

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.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1995Another look at the instrumental variable estimation of error-components models 1998Law and Finance 1997A Survey of Corporate Governance 1996Agency costs of free cash flow, corporate finance, and takeovers 2005Performance matched discretionary accrual measures 2003Earnings Management through Real Activities Manipulation 2003Earnings management and investor protection: an international comparison

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