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Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management

Tunyi Tunyi Abongeh Orcid Logo, Michael Machokoto

Journal of Accounting Literature

Swansea University Author: Tunyi Tunyi Abongeh Orcid Logo

Abstract

Purpose: This study examines whether board reforms implemented across countries influence firms' earnings management choices. While governance reforms are designed to strengthen monitoring and improve financial reporting quality, we argue that enhanced board oversight may unintentionally alter...

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Published in: Journal of Accounting Literature
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URI: https://cronfa.swan.ac.uk/Record/cronfa71980
first_indexed 2026-05-25T11:09:50Z
last_indexed 2026-05-27T06:48:46Z
id cronfa71980
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fullrecord <?xml version="1.0"?><rfc1807><datestamp>2026-05-25T12:16:52.6802320</datestamp><bib-version>v2</bib-version><id>71980</id><entry>2026-05-25</entry><title>Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management</title><swanseaauthors><author><sid>eefe2792c8eed5b49feede33981dfa53</sid><ORCID>0000-0002-5761-931X</ORCID><firstname>Tunyi</firstname><surname>Tunyi Abongeh</surname><name>Tunyi Tunyi Abongeh</name><active>true</active><ethesisStudent>false</ethesisStudent></author></swanseaauthors><date>2026-05-25</date><deptcode>CBAE</deptcode><abstract>Purpose: This study examines whether board reforms implemented across countries influence firms' earnings management choices. While governance reforms are designed to strengthen monitoring and improve financial reporting quality, we argue that enhanced board oversight may unintentionally alter the form, rather than the existence, of earnings management. Specifically, reforms that constrain accrual-based manipulation may incentivise managers to substitute toward more costly, but less detectable, real earnings management activities.Design/methodology/approach:We exploit the staggered implementation of major board reforms across 22 countries as a quasi-natural experiment and employ a difference-in-difference research design. Our sample comprises 53,515 firm-year observations from 7,569 listed firms over the period 1993--2012. We examine both accrual and real earnings management using established measures from the literature and further investigate how specific reform features and institutional environments shape the effectiveness and consequences of reforms.Findings: We find that board reforms significantly reduce accrual earnings management, consistent with stronger monitoring and governance oversight. However, we simultaneously document a significant increase in real earnings management following reforms, suggesting that firms substitute away from accrual manipulation toward operational forms of earnings management. The substitution effect is stronger for reforms that enhance board independence, audit committee effectiveness, auditor independence, and rule-based compliance. We further show that the effects are more pronounced in countries with stronger institutional quality and investor protection.Originality: This study contributes to the international corporate governance and earnings management literature by providing large-sample cross-country evidence that governance reforms generate both intended and unintended consequences. Unlike prior studies that largely portray board reforms as uniformly beneficial, we show that stronger governance oversight can induce managers to shift toward more economically costly forms of earnings management. Our findings also extend evidence from the U.S. SOX setting by demonstrating that the substitution between accrual and real earnings management is a broader international phenomenon shaped by reform design and institutional context.Practical implications: Our findings suggest that governance reforms aimed at strengthening board oversight may not fully eliminate opportunistic reporting behaviour, but instead alter the mechanisms through which managers manage earnings. Regulators and policymakers should therefore complement board reforms with monitoring and enforcement mechanisms capable of detecting operational manipulation and real earnings management activities.</abstract><type>Journal Article</type><journal>Journal of Accounting Literature</journal><volume/><journalNumber/><paginationStart/><paginationEnd/><publisher/><placeOfPublication/><isbnPrint/><isbnElectronic/><issnPrint/><issnElectronic/><keywords/><publishedDay>0</publishedDay><publishedMonth>0</publishedMonth><publishedYear>0</publishedYear><publishedDate>0001-01-01</publishedDate><doi/><url/><notes/><college>COLLEGE NANME</college><department>Management School</department><CollegeCode>COLLEGE CODE</CollegeCode><DepartmentCode>CBAE</DepartmentCode><institution>Swansea University</institution><apcterm>Not Required</apcterm><funders/><projectreference/><lastEdited>2026-05-25T12:16:52.6802320</lastEdited><Created>2026-05-25T12:00:58.3988061</Created><path><level id="1">Faculty of Humanities and Social Sciences</level><level id="2">School of Management - Accounting and Finance</level></path><authors><author><firstname>Tunyi</firstname><surname>Tunyi Abongeh</surname><orcid>0000-0002-5761-931X</orcid><order>1</order></author><author><firstname>Michael</firstname><surname>Machokoto</surname><order>2</order></author></authors><documents/><OutputDurs/></rfc1807>
spelling 2026-05-25T12:16:52.6802320 v2 71980 2026-05-25 Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management eefe2792c8eed5b49feede33981dfa53 0000-0002-5761-931X Tunyi Tunyi Abongeh Tunyi Tunyi Abongeh true false 2026-05-25 CBAE Purpose: This study examines whether board reforms implemented across countries influence firms' earnings management choices. While governance reforms are designed to strengthen monitoring and improve financial reporting quality, we argue that enhanced board oversight may unintentionally alter the form, rather than the existence, of earnings management. Specifically, reforms that constrain accrual-based manipulation may incentivise managers to substitute toward more costly, but less detectable, real earnings management activities.Design/methodology/approach:We exploit the staggered implementation of major board reforms across 22 countries as a quasi-natural experiment and employ a difference-in-difference research design. Our sample comprises 53,515 firm-year observations from 7,569 listed firms over the period 1993--2012. We examine both accrual and real earnings management using established measures from the literature and further investigate how specific reform features and institutional environments shape the effectiveness and consequences of reforms.Findings: We find that board reforms significantly reduce accrual earnings management, consistent with stronger monitoring and governance oversight. However, we simultaneously document a significant increase in real earnings management following reforms, suggesting that firms substitute away from accrual manipulation toward operational forms of earnings management. The substitution effect is stronger for reforms that enhance board independence, audit committee effectiveness, auditor independence, and rule-based compliance. We further show that the effects are more pronounced in countries with stronger institutional quality and investor protection.Originality: This study contributes to the international corporate governance and earnings management literature by providing large-sample cross-country evidence that governance reforms generate both intended and unintended consequences. Unlike prior studies that largely portray board reforms as uniformly beneficial, we show that stronger governance oversight can induce managers to shift toward more economically costly forms of earnings management. Our findings also extend evidence from the U.S. SOX setting by demonstrating that the substitution between accrual and real earnings management is a broader international phenomenon shaped by reform design and institutional context.Practical implications: Our findings suggest that governance reforms aimed at strengthening board oversight may not fully eliminate opportunistic reporting behaviour, but instead alter the mechanisms through which managers manage earnings. Regulators and policymakers should therefore complement board reforms with monitoring and enforcement mechanisms capable of detecting operational manipulation and real earnings management activities. Journal Article Journal of Accounting Literature 0 0 0 0001-01-01 COLLEGE NANME Management School COLLEGE CODE CBAE Swansea University Not Required 2026-05-25T12:16:52.6802320 2026-05-25T12:00:58.3988061 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Tunyi Tunyi Abongeh 0000-0002-5761-931X 1 Michael Machokoto 2
title Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management
spellingShingle Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management
Tunyi Tunyi Abongeh
title_short Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management
title_full Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management
title_fullStr Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management
title_full_unstemmed Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management
title_sort Good Intentions, Costly Outcomes: The Unintended Effects of Board Reforms on Earnings Management
author_id_str_mv eefe2792c8eed5b49feede33981dfa53
author_id_fullname_str_mv eefe2792c8eed5b49feede33981dfa53_***_Tunyi Tunyi Abongeh
author Tunyi Tunyi Abongeh
author2 Tunyi Tunyi Abongeh
Michael Machokoto
format Journal article
container_title Journal of Accounting Literature
institution Swansea University
college_str Faculty of Humanities and Social Sciences
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hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
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description Purpose: This study examines whether board reforms implemented across countries influence firms' earnings management choices. While governance reforms are designed to strengthen monitoring and improve financial reporting quality, we argue that enhanced board oversight may unintentionally alter the form, rather than the existence, of earnings management. Specifically, reforms that constrain accrual-based manipulation may incentivise managers to substitute toward more costly, but less detectable, real earnings management activities.Design/methodology/approach:We exploit the staggered implementation of major board reforms across 22 countries as a quasi-natural experiment and employ a difference-in-difference research design. Our sample comprises 53,515 firm-year observations from 7,569 listed firms over the period 1993--2012. We examine both accrual and real earnings management using established measures from the literature and further investigate how specific reform features and institutional environments shape the effectiveness and consequences of reforms.Findings: We find that board reforms significantly reduce accrual earnings management, consistent with stronger monitoring and governance oversight. However, we simultaneously document a significant increase in real earnings management following reforms, suggesting that firms substitute away from accrual manipulation toward operational forms of earnings management. The substitution effect is stronger for reforms that enhance board independence, audit committee effectiveness, auditor independence, and rule-based compliance. We further show that the effects are more pronounced in countries with stronger institutional quality and investor protection.Originality: This study contributes to the international corporate governance and earnings management literature by providing large-sample cross-country evidence that governance reforms generate both intended and unintended consequences. Unlike prior studies that largely portray board reforms as uniformly beneficial, we show that stronger governance oversight can induce managers to shift toward more economically costly forms of earnings management. Our findings also extend evidence from the U.S. SOX setting by demonstrating that the substitution between accrual and real earnings management is a broader international phenomenon shaped by reform design and institutional context.Practical implications: Our findings suggest that governance reforms aimed at strengthening board oversight may not fully eliminate opportunistic reporting behaviour, but instead alter the mechanisms through which managers manage earnings. Regulators and policymakers should therefore complement board reforms with monitoring and enforcement mechanisms capable of detecting operational manipulation and real earnings management activities.
published_date 0001-01-01T17:20:58Z
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score 11.106612

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