The Art of Discretion : Essays on Earnings Management, Governance, and Capital Structure

Abstract: This dissertation is a compilation of three articles on earnings management, governance and capital structure. In addition to these three articles, the introductory chapter establishes the link between these articles and summarizes them.Article I investigates the joint effect of governance mechanisms on earnings management. This study finds evidence in support of imperfect substitution and complement effects of corporate governance and industry regulation on earnings management.Article II investigates the role of the discretionary environment for earnings management, using several measures of governance and contextual mechanisms. The findings of this article show that the discretionary environment matters in explaining earnings management practices. Therefore, the use of a tractable and quantifiable measure of the discretionary environment has the potential to refine measures of earnings management and mitigate the mixed inferences made from these measures in the literature. Hence, this study contributes to the literature by augmenting accrual-based earnings management models with governance and contextual mechanisms.Article III examines the role of managerial traits in the active management of capital structure within the boundaries of a system of financial and governance constraints. The findings of this article show that the managerial discretionary index as a measure of managerial traits is associated with leverage growth and the satisficing effect is statistically significant. The results also show that the association is nonlinear under some combinations of financial and governance constraints (relatively low and high constraints), and linear in others.