Financial Development, Corporate Governance and Earnings Management: A Cross-Country Analysis

Abstract

This paper investigates whether the country's level of financial development helps mitigate the firms' accrual and real earnings management practices while considering the mediating role of corporate governance attributes, i.e., ownership structure. Using a sample of 600 non-financial firms of 22 developing and developed economies from 2008 to 2017, we applied the Generalized Method of Moments (GMM) to estimate the moderated mediation model. Our results, firstly, verified the negative association between financial development and earning management practices in developed and developing countries. Secondly, managerial and institutional ownership which are proxies of ownership structure, significantly mediates the relationship of financial development with accrual and real earnings management. Lastly, we found that measures of CM, board independence, and audit committee independence, significantly moderate this mediation process of ownership structure in the relationship of financial development with accrual/real earning management. This paper contributes to the literature by providing evidence that the CM moderates the mediation process of ownership structure between financial development and earnings management. This moderation is negative when earning management is measured as real earning management. However, it is positive in the case of accrual earning management. The empirical evidence of this research is potentially helpful to academicians and regulators in strengthening the legitimacy of corporate governance policies while emphasizing financial development.