Managerial Opportunism in Accounting Choice

Download or read book Managerial Opportunism in Accounting Choice written by Narjess Boubakri and published by . This book was released on 2012 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the relation between the managerial opportunism embedded in earnings management, and Damp;O insurance. We investigate (a) whether managers are more willing to engage in opportunistic behavior by adopting an aggressive earnings management strategy when they are covered by a relatively higher Damp;O insurance limit; (b) whether managers purchase Damp;O insurance coverage in anticipation of opportunistic accounting choice; and (c) whether insurers can distinguish abnormally large insurance purchases driven by opportunism in accounting choice from those driven by abnormal risk aversion. Our evidence strongly supports the managerial opportunism hypothesis in managing earnings. In particular, we find that managers purchase insurance coverage in anticipation of opportunistic earnings management around equity issuing events. We also find that the best insured managers are those who manipulate the most the earnings. Interestingly, we find that the insurers are not myopic to the harms of opportunistic managerial behavior. They are able to detect and charge higher insurance premiums to managers with a hidden opportunistic agenda. Overall, these results suggest that the Damp;O insurance market enhances opportunistic managerial behavior. We do not find any support for the prediction that lower Damp;O insurance premiums are associated with good corporate governance quality.