Corporate Governance and Earnings Management : Evidence from Shareholder Proposals

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)1434-1464
Number of pages31
Journal / PublicationContemporary Accounting Research
Issue number2
Online published23 Aug 2020
Publication statusPublished - Jun 2021
Externally publishedYes


We examine the causal effects of corporate governance on earnings management using shareholder-sponsored proposals that pass or fail by a small margin of votes in annual shareholder meetings. This setting provides a causal estimate that overcomes concerns of endogeneity. Specifically, compared with firms whose shareholder proposals fall just short of a majority threshold, firms whose shareholder proposals narrowly pass have similar characteristics but a discretely higher likelihood of implementing improvements in governance. As such, we expect that firms whose shareholder proposals pass the threshold by a small margin exhibit a significantly lower level of earnings management. Employing a regression discontinuity design, we find results that support our expectation based on the propensity to just meet or beat analysts' forecasts by one cent as a proxy for earnings management. In addition, we show that the results are driven by governance changes that increase directors' monitoring. Our results are robust to using discretionary accruals as an alternative measure of earnings management. Collectively, the results suggest that improvements in corporate governance curtail earnings management, and support the underlying premise of regulators that improvements in corporate governance would improve financial reporting.


Research Area(s)

  • corporate governance, earnings management, shareholder activism, shareholder proposals

Bibliographic Note

Publisher Copyright: © CAAA

Citation Format(s)

Corporate Governance and Earnings Management: Evidence from Shareholder Proposals. / Fan, Zhongwen; Radhakrishnan, Suresh; Zhang, Yuan.
In: Contemporary Accounting Research, Vol. 38, No. 2, 06.2021, p. 1434-1464.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review