Examining the Role of Corporate Governance in Earnings Manipulation During Mergers and Acquisitions

Abstract

Governance of business enterprises plays an important role in determining the transparent financial dealings and ethical behavior of a firm during mergers and acquisitions (M&As), which are notorious for manipulation of earnings. This study looks into the dynamics of the governance mechanisms and earnings manipulation during M&As, emphasizing how governance structures may either prevent or induce earnings manipulation during the acquisition process. By reviewing the literature and empirical studies, among which are the studies done by Elmassri et al. (2024) and Elrazaz et al. (2024), the study investigates corporate governance factors such as board composition, executive compensation, and shareholder rights that affect decision-making in M&As. Another aspect that the current research explores is the role of corporate social responsibility (CSR) in fostering transparency and ethical decisions in the M&A process, drawing on the works of Fallah Shayan et al. (2022) and Kolsi et al. (2024). The findings point out that with strong corporate governance, especially governance mechanisms aimed at ensuring executive accountability and board independence, the incidence of earnings manipulation can be dampened. On the contrary, the presence of weak governance structures gives room to opportunistic behavior that leads to manipulation of financial reporting to the detriment of stakeholders. This article adds to the growing literature on corporate governance by providing new insights into the governance process within the framework of earnings manipulation during M&As and offers recommendations aimed at strengthening governance structures to encourage greater ethical practices in the M&A business.