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Authors:

• Joanne LI
  Loyola College in Maryland

• Ken SMALL
  Loyola College in Maryland

• Seung-Woog KWAG
  Utah State University

We examine the relationship between shareholder rights and managerial propensity to engage in earnings management. Management of firms with poor shareholder rights may exhibit a decreased willingness to manage earnings because of insulation from punishment for poor financial performance. Using a measure of shareholder rights, and after controlling for several factors that influence management’s decision to manage earnings, we conclude that increases in shareholder rights significantly increase management’s willingness to engage in earnings management. The results support the conclusion that earnings management is not independent of governance structure, and the reduced probability of direct corrective action by shareholders impacts the likelihood that a firm’s management will engage in earnings management.