*The Joint Effect of Internal and External Governance on Earnings Management and Firm Performance

• In Event: Governance and regulatory issues

Abstract

This study examines whether shareholders use internal governance mechanisms (i.e., manager
compensation, shareholder rights protection at firm level) to substitute for weak external
governance (i.e., investor protection mechanisms at country level) in restricting earnings
management. We find that the impact of internal governance on earnings management is stronger
in countries with weak external governance. Examining the consequence of earnings
management on firm performance, we find that internal governance restricts earnings
management more efficiently than external governance. This study extends prior literature by
quantifying the impact of internal and external governance on earnings management and firm
performance. Our findings suggest that shareholders should pay more attention to internal
governance than to external governance in controlling for earnings management.

Authors

• Hong Kim Duong, University of Texas at El Paso

• Stephen Brian Salter, Middle Tennessee State University

• Helen Kang, UNSW Australia