How Corporate Governance Mitigates the Abuse of Accounting Discretion: The Perspective of Firm Performance

10.6504/JOM.2007.24.04.04

An-Lin Chen；Lan-Feng Kao；Hui-Wen Tang

Accounting discretion ； Corporate governance ； Earnings management ； Firm performance

管理學報

24卷4期（2007 / 08 / 01）

419 - 434

英文

Prior studies indicate that accounting discretion can be abused to hurt firm performance under opportunistic perspective, while it can also be used in response to a variable economic environment under efficient contracting perspective. Consequently, investors have difficulties to probe managers' intrinsic motivation toward earnings management. We find that the abuse of accounting discretion leads to poor performance and reduces shareholders' wealth. We further show that proper governance deters the abuse of accounting discretion. Finally, we demonstrate that accounting discretion under corporate governance does not hurt firm performance but even improves firm performance. We argue that corporate governance can mitigate the abuse of accounting discretion and improve the effect of on firm performance.

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