Board reforms and earnings management

We examine the role of major corporate board reforms around the world in constraining earnings management. Using a large sample of 7,569 listed firms from 19 countries and a difference-in-difference design, we find that board reforms constrain firms' accrual earnings management. However, in response, firms increase their levels of real earnings management, particularly through the reduction of discretionary expenses such as investments in R&D, to address short term earnings pressures. Consequently, specific board reform features (i.e., board independence and rule-based regulations) and external institutions that actively curb accrual earnings management also induce real earnings management. Overall, our evidence suggests that firms with incentives to manage earnings resort to more costly real earnings management when their ability to manipulate accruals is externally constrained. These results have important implications for governance regulation around the world as they contrast with the budding literature suggesting that reforms almost always lead to positive outcomes.