Purpose This study examines whether board reforms implemented across countries influence firms' earnings management choices. While governance reforms are designed to strengthen monitoring and improve financial reporting quality, we argue that enhanced board oversight may unintentionally alter the form, rather than the existence, of earnings management. Specifically, reforms that constrain accrual-based manipulation may incentivise managers to substitute toward more costly, but less detectable, real earnings management activities. Design/methodology/approach We exploit the staggered implementation of major board reforms across 22 countries as a quasi-natural experiment and employ a difference-in-difference research design. Our sample comprises 53,515 firm-year observations from 7,569 listed firms over the period 1993–2012. We examine both accrual and real earnings management using established measures from the literature and further investigate how specific reform features and institutional environments shape the effectiveness and consequences of reforms. Findings We find that board reforms significantly reduce accrual earnings management, consistent with stronger monitoring and governance oversight. However, we simultaneously document a significant increase in real earnings management following reforms, suggesting that firms substitute away from accrual manipulation toward operational forms of earnings management. The substitution effect is stronger for reforms that enhance board independence, audit committee effectiveness, auditor independence, and rule-based compliance. We further show that the effects are more pronounced in countries with stronger institutional quality and investor protection. Practical implications Our findings suggest that governance reforms aimed at strengthening board oversight may not fully eliminate opportunistic reporting behaviour, but instead alter the mechanisms through which managers manage earnings. Regulators and policymakers should therefore complement board reforms with monitoring and enforcement mechanisms capable of detecting operational manipulation and real earnings management activities. Originality/value This study contributes to the international corporate governance and earnings management literature by providing large-sample cross-country evidence that governance reforms generate both intended and unintended consequences. Unlike prior studies that largely portray board reforms as uniformly beneficial, we show that stronger governance oversight can induce managers to shift toward more economically costly forms of earnings management. Our findings also extend evidence from the U.S. SOX setting by demonstrating that the substitution between accrual and real earnings management is a broader international phenomenon shaped by reform design and institutional context.
Tunyi et al. (Wed,) studied this question.