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An Investigation of the Association Between
Governance Quality and Accrual-Based Earnings Quality
Mindell Reiss Nitkin,
Simmons College
ABSTRACT. This paper brings together the literature on corporate governance and earnings quality. Despite the positive association found between specific governance choices and earnings quality, the relationship between earnings quality and the overall tenor of a firm's governance is not clear. By aggregating individual governance choices relative to the governing rules of firms and the composition of the Board of Directors, I develop a set of index measures that reflect the overall tenor of a firm's governance portfolio. Using these indices, I investigate the association between governance and accruals-based earnings quality. Findings show that firms with better governance manage earnings more than firms with poorer governance, but that they are more likely to sue income-decreasing discretionary accruals rather than income –increasing. The results reflect systematic trade-offs between both earnings quality and governance quality as well as between aspects of earnings quality.
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