Kin-Wai Lee

Organizational Structure and Earnings Management

In this study, we identify a fundamental attribute of the organizational structure of the firm—the intensity of interdivisional transaction relatedness and complementarity—which contributes to earnings management. We draw from the theoretical economics literature that demonstrates that intrafirm collusion is more likely in hierarchical and complex organizational structure. We posit that intrafirm collusion toward a common organizational goal is more prevalent in highly related organizational structure because the economic welfare of economic agents is highly interdependent. Consistent with our hypothesis, we find that earnings management is positively associated with organizational relatedness. We also find that, for firms with high organizational relatedness, those with a high proportion of outside directors and high institutional equity ownership have less pronounced earnings management. Collectively, our result suggests an interaction between corporate governance structure and organizational relatedness in affecting earnings quality.

Capital Structure in Asia and CEO Entrenchment

We examine the association between CEO entrenchment and capital structure decisions of Asian firms. We find that firms with higher CEO entrenchment have a lower level of leverage. Specifically, firms with CEOs who chair the board, have a higher CEO tenure, and have a lower proportion of outside directors, have lower leverage. The negative association between CEO entrenchment and corporate leverage is more pronounced in firms with higher agency costs of free cash flow. In addition, for firms with entrenched CEOs, those firms with greater institutional investor equity ownership have higher leverage. This result suggests that active monitoring by large shareholders mitigate sentrenched CEOs’ incentives to avoid debt.