Internal corporate governance and cash flow manipulation

Abstract

Purpose

The authors examine whether internal corporate governance mechanisms are effective in curbing cash flow manipulation through real activities, misclassification, and timing. Design/methodology/approach

The sample comprises of firms from an emerging market, India with data for years 2004 through 2015. The authors use the methodology given in Roychowdhury (2006). Findings

The authors find that corporate boards in India play an active role in curbing cash flow manipulation through real activities but fail to control cash flow manipulation through misclassification and timing. Practical implications

The study suggests that corporate boards should pay more attention to the reported cash flow numbers. Regulators can reduce the opportunities available for cash flow misclassification by fixing relevant accounting and governance norms. Auditors can also help by critically focusing on the cash flow classifications presented by management. Originality/value

This study, to the authors’ knowledge, is the first study that talks about the role of internal governance in a trade-off between different cash flow manipulation techniques.