Association between Managerial Overinvestment Propensity and Real and Accrual-Based Earnings Management

Abstract

It has long been recognized by many researchers that managers’ decisions for resource allocation may be inefficient and can destroy investor value. Managers are inclined to make empire building decisions if not checked by some tight form of governance. Empire building decisions typically manifest themselves in the forms of excessive growth and excessive investment. It has been known that by increasing firm size, managers can pursue status, power, compensation, and prestige. This problem may exacerbate with the lack of information transparency. Previous research suggests that when managers are less accountable to the firm’s investors, they are more likely to make decisions for private gain, leading to poorer firm performance and ultimately loss of shareholder value. Financial disclosures are one important means of monitoring managers to make them more accountable. Investors seek high-quality disclosures that reduce information asymmetries between investors and managers. Financial accounting information is an important source