This study examines the relationship between organizational capital and earnings management, addressing whether internally embedded organizational capabilities influence financial reporting behavior.
Using a panel of publicly listed non-financial firms on the New York Stock Exchange from 2011 to 2023, the study measures organizational capital via the perpetual inventory method and analyzes its association with three forms of earnings management: accrual-based earnings management, real earnings management, and classification shifting. The analysis employs fixed-effects regressions and addresses endogeneity concerns through propensity score matching, entropy balancing, dynamic system GMM estimation, and the inclusion of additional control variables. Further analyses explore the moderating effects of product market competition, information asymmetry, and agency frictions.
Our results reveal a negative relationship between organizational capital and all three forms of earnings management. This association persists across alternative model specifications, estimation techniques, and organizational capital proxies. The study finds that the effect of organizational capital is stronger in highly competitive environments, for firms with lower information asymmetry, and for firms facing lower agency frictions.
This study contributes to the earnings management literature by introducing organizational capital as a governance mechanism that constrains managerial opportunism. By adopting a multidimensional earnings management framework and reconciling both the value-enhancing and potentially distortionary aspects of organizational capital, the study offers a more integrated understanding of how internal organizational capabilities shape financial reporting quality.
