TY - JOUR
T1 - Organizational structure and earnings management
AU - Lee, Kin Wai
AU - Lev, Baruch
AU - Yeo, Gillian
PY - 2007
Y1 - 2007
N2 - In this study, we identify a fundamental attribute of the organizational structure of the firm - the intensity of interdivisional transaction relatedness and complementarity - which contributes to earnings management. We draw from the theoretical economics literature that demonstrates that intrafirm collusion is more likely in hierarchical and complex organizational structure. We posit that intrafirm collusion toward a common organizational goal is more prevalent in highly related organizational structure because the economic welfare of economic agents is highly interdependent. Consistent with our hypothesis, we find that earnings management is positively associated with organizational relatedness. We also find that, for firms with high organizational relatedness, those with a high proportion of outside directors and high institutional equity ownership have less pronounced earnings management. Collectively, our result suggests an interaction between corporate governance structure and organizational relatedness in affecting earnings quality.
AB - In this study, we identify a fundamental attribute of the organizational structure of the firm - the intensity of interdivisional transaction relatedness and complementarity - which contributes to earnings management. We draw from the theoretical economics literature that demonstrates that intrafirm collusion is more likely in hierarchical and complex organizational structure. We posit that intrafirm collusion toward a common organizational goal is more prevalent in highly related organizational structure because the economic welfare of economic agents is highly interdependent. Consistent with our hypothesis, we find that earnings management is positively associated with organizational relatedness. We also find that, for firms with high organizational relatedness, those with a high proportion of outside directors and high institutional equity ownership have less pronounced earnings management. Collectively, our result suggests an interaction between corporate governance structure and organizational relatedness in affecting earnings quality.
KW - Corporate governance
KW - Earnings management
KW - Organizational structure
UR - http://www.scopus.com/inward/record.url?scp=34247617168&partnerID=8YFLogxK
U2 - 10.1177/0148558X0702200213
DO - 10.1177/0148558X0702200213
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AN - SCOPUS:34247617168
SN - 0148-558X
VL - 22
SP - 293
EP - 331
JO - Journal of Accounting, Auditing and Finance
JF - Journal of Accounting, Auditing and Finance
IS - 2
ER -