Hide-And-Seek in Earnings Management-Financial Performance Nexus: The Influence of Corporate Governance Mechanisms

This research aims to explore the moderating effects of corporate governance mechanisms on the relationship between earnings management and financial performance. This investigation is conducted considering the background of agency, legitimacy, and upper echelons theories. Using a sample of international non-financial companies, with data available on Thomson Reuters Eikon for the 2018-2023 period, this research employs multiple regression analysis. The discretionary accruals variable is a proxy for earnings management, return on equity measures financial performance, while company activity is reflected by various control variables. Corporate governance mechanisms referring to board independence, board diversity, executive committee diversity, board activity, and CSR strategy are included to identify whether they may significantly interact on the earnings management-financial performance nexus. The exploratory analysis of data (descriptive statistics and correlation analysis) is complemented by a panel random-effects regression modelling performed in STATA18 software, to test the research hypotheses. The main findings indicate strong evidence that financial performance is positively and significantly influenced by earnings management practices. Mixed impacts are found for the corporate governance mechanisms on financial performance. Muchmore, findings emphasize that board independence and executive diversity significantly moderates the impact of discretionary actuals generating an increasing in financial performance, while board diversity and board activity interact with discretionary accrual by decreasing the financial performance. These outcomes imply that corporate governance mechanisms may influence management decisions of using earnings manipulation to financial performance’s window-dressing.