Do Strong Shareholder Rights Mitigate Earnings Management?

In this paper we examine the relationship between the strength of a firm's shareholders rights, as part of their overall corporate governance structure, and the discretionary financial reporting choices made by the firm's financial executives. Specifically, we examine the strength of shareholders rights and the reported levels of discretionary accounting accruals and the use of special reporting items on the income statement. We posit and find that in settings where shareholder rights are strong, after controlling for other reporting related factors, managers report lower levels of discretionary accruals and special reporting items, and use special reporting items significantly less frequently compared to firms with weak shareholder rights. Our findings suggest that having strong shareholder rights imposes additional monitoring on the firm's financial reporting executives, leading to reduced earnings management attempts by financial executives and higher quality financial reporting