Ó Springer 2009 Journal of Business Ethics (2010) 93:335–353 DOI 10.1007/s10551-009-0225-7 Ethics, Diversity Management, and Financial Reporting Quality ABSTRACT This article proposes and empirically tests a theoretical framework incorporating Reidenbach and Robin’s (J Bus Ethics 10(4):273–284, 1991) conceptual model of corporate moral development The framework is used to examine the relation between governance and business ethics, as proxied by diversity management (DM), and financial reporting quality, as proxied by the magnitude of earnings management (EM) The level of DM and governance quality are measured in accordance with the ratings of Jantzi Research (JR), a leading provider of social and governance research for institutional investors This DM score is part of an index developed by JR that investment managers use to integrate DM criteria into their investment decisions As expected, a negative relation between corporate DM development and financial reporting quality is found while controlling for other factors known in the literatures on governance and accounting choices to affect earnings quality Despite some caveats presented in conclusion, this study contributes to the ethics, governance, and financial reporting literatures by studying the dynamics between governance and ethics in the prevention of EM KEY WORDS: ethics, diversity, diversity management, governance, financial reporting quality, earnings management, earnings quality Introduction As accounting is closely regulated, the issue of financial reporting quality (FRQ) is often addressed as a matter of compliance to various governance regulations rather than ethics This legal oversight perspective prevails as business ethics does not appear to be sufficiently developed to prevent managers from manipulating the information they provide to various stakeholders about their own performance.1 However, despite this emphasis on compliance, ´ Real Labelle Rim Makni Gargouri Claude Francoeur FRQ also presupposes unwritten rules of ethical behavior Governance complements business ethics In other words, if managers were expected to behave in an ethical manner, governance would be less relevant2 and, in the limit, ethics could substitute for governance These ‘‘legalistic’’ and ‘‘ethical’’ perspectives correspond to distinct stages in the conceptual model of corporate moral development (CMD) proposed by Reidenbach and Robin (1991) This theory is inspired by the study of Kolhlberg (1984) on individual moral development, and Piaget (1932/1962) on child development The objective of this article is to use the theory of CMD to study the dynamics between governance and ethics in the prevention of earnings management (EM), a proxy for FRQ To date, relatively few studies have examined the presumed relationship between FRQ and board of directors’ characteristics other than the ones complying with generally accepted governance principles as reviewed in He et al (2009).3 The objective of this article is to propose and test a theory-based framework (Fig 1) where diversity management (DM) is presented as an ethical complement to statutory governance aimed at improving FRQ and ultimately at creating value Rather than concentrate on the concept of independence or diversity of financial interests promulgated in statutory governance, diversity of knowledge, competence, and organization’s values are also considered We use the Canadian Social Investment Database (CSID) compiled by Jantzi Research (JR) on both DM and governance corporate policies to proxy for the firms’ propensity to respectively implement and respect such stakeholder- and shareholder-oriented policies FRQ is appraised by the firms’ propensity to more or less manage earnings Other factors known to be 336 ´ Real Labelle et al Fig Ethics, diversity management, and financial reporting quality associated with the quality of earnings in various areas of the accounting choices literature are also controlled for Governance comprises the set of principles or rules aimed at improving the accuracy and reliability of corporate disclosures with which firms have to comply to insure investors’ protection Reidenbach and Robin4 (1991) argue that an ethical approach mainly based on rule compliance is at the lower level of CMD They propose five stages of organizational moral development including the legalistic (stage 2), the responsive (stage 3), and the emergent ethical (stage 4) organization In this study, a firm which adopts a DM policy thus showing concern for other corporate stakeholders than owners (stage in R & R, pp 278, 282) understands the value of not acting solely on a legal basis (stage in R & R, pp 276, 282) ‘‘Diversity management is a voluntary organizational program designed to create greater inclusion of all individuals into informal social networks and formal company programs’’ (Gilbert et al., 1999, p 61) In order to reach R & R’s fourth stage of CMD, i.e., the emerging ethical organization, top management values must become organizational values and be integrated in the organizational culture Our research design is aimed at examining whether the degree of moral or ethical development of a corporation is related to the quality of its financial reporting We this by isolating the marginal effect of the stakeholder-oriented policy of promoting diversity and employment equity from the governance-presumed effect on FRQ as proxied by EM The diversity of boards, other than the one required in governance codes to insure that the financial interests of board members are aligned with shareholders rather than managers, is also starting to permeate governance regulation around the world Many propositions for governance reforms have explicitly emphasized the importance of diversity in the boardroom (Adams and Ferreira, 2008) In Great Britain, the Higgs report (Higgs, 2003), commissioned by the British Department of Trade and Industry, maintains that diversity can improve board efficiency Diversity of boards has also attracted the interest of institutional investors for several years For instance, according to Carter et al (2003), the Teachers Insurance and Annuity Association-College Retirement Equities Fund has adopted a policy statement on corporate governance (CG), which stipulates that the board must be made up of qualified individuals that Ethics, Diversity Management and Financial Reporting Quality reflect a diversity of experience, gender, race, and age (TIAA-CREF, 1997) TIAA uses diversity as an investment criterion and considers this board characteristic as fundamental in limiting executives’ discretionary behavior (Carter et al., 2003) Despite the presumed role of ethics or CMD as a complement to governance regulation in controlling opportunistic EM behavior, there is a near vacuum of empirical literature on this subject This is most likely due to the fact that business ethics is more difficult to observe and measure than compliance with governance regulation We propose to use DM as defined above to proxy for the level of business ethics or CMD To our knowledge, one exploratory (Krishnan and Parsons, 2008) and two unpublished studies (Francis et al., 2009; Gul et al., 2007) have started to test the link between gender diversity as measured by the proportion of women on boards and FRQ We contend that the concept of DM is much larger than gender diversity which may be closer to affirmative action (Gilbert et al., 1999) than to business ethics Again, because gender diversity is easier to observe than DM, there is a growing literature investigating the impact of gender on various corporate decisions such as capital structure decisions (Huang and Kisgen, 2008), merger and acquisition (Levi et al., 2008), and going public (Mohan and Chen, 2004) In order to examine whether the degree to which firms, instead of solely relying on compliance, also stress ethics and diversity in the workplace have better FRQ, we use data from the CSID compiled by JR, a leading provider of research on governance and social research for institutional investors The CSID score for CG measures compliance with governance regulations The CSID score for DM incorporates several aspects of diversity in addition to gender diversity on the board which was the sole aspect examined in previous research Our sample is composed of all the companies appraised by JR in 2004 and 2005 As hypothesized, our findings show a significant negative association between DM, our proxy for CMD, and EM, our proxy for FRQ There is no statistically significant relation between CG and FRQ We interpret these results as confirming that FRQ is related to a higher level of CMD Indeed, the degree of implementation and respect of an ethical stakeholder-oriented policy such as the promotion of diversity on the board and 337 among management and employees appears to enhance earnings quality This is a significant result as earnings quality is commonly used as an important governance tool in measuring management’s transparency and performance The remainder of the article is organized as follows The next section presents the theoretical framework of the study followed by a review of the literature in ‘‘Review of empirical literature’’ section ‘‘Model development, data collection, and variable measurement’’ section describes the methodology and empirical models used Results are presented and discussed in ‘‘Analysis and interpretation of results’’ section The last section presents the conclusions and caveats and proposes some avenues for future research Theoretical framework Figure proposes a theory-based framework linking ethics or CMD and diversity in governance with the prevention of EM and ultimately value creation Governance is presented as both advisory (left-hand side) and fiduciary (right-hand side) in nature Both roles may affect or be affected by business ethics or CMD in a different manner From the fiduciary perspective, qualified directors have to be independent and even specialists in monitoring, as per the stipulation of the current regulation and generally accepted governance principles concerning the composition of the board and its audit committee.5 In theory and in corporate law, primacy is given to shareholders’ interests Agency theory, the main theory providing explanations for governance, predicts management interests are different and even in conflict with those of shareholders Thus, the emphasis is on the diversity of opinions and financial interests of board members This kind of diversity is required from them so they are incited to keep on questioning or monitoring whether management stays in compliance with governance regulation and meets its fiduciary duty From the advisory perspective of governance (lefthand side of Fig 1), board effectiveness requires a diversity of knowledge, competences, and organizational values to guide and contribute to organizational learning and strategic decision making The emphasis is on counseling and mentoring management, and not 338 ´ Real Labelle et al on the statutory characteristics such as the diversity of interests or the financial literacy of the directors Theories based on resources, competences, and organizational learning explain the more direct link with value creation shown in Fig Although investors’ protection still matters, under that perspective, there is room to develop an organizational culture or corporate policies which integrate a wider range of stakeholders instead of having to focus by law on shareholders This time, diversity is necessary for board members to be able to ask knowledgeable questions to shape the managerial decision-making process and the organization’s culture For R & R (1991), the moral development of a corporation is determined by the organization’s culture and, in reciprocal fashion, helps define that culture In essence, it is the organization’s culture under the impetus of top management and advisory governance, which undergoes moral development Nowadays, society is demanding that the economic development of corporations be equated with their moral development The moral development of a corporation can be classified according to the degree to which its social responsibility is recognized and blended with its economic mission R & R (1991) propose a model of CMD comprised of stages based on the following types of behavior The first and the lowest stage of CMD is the ‘‘amoral organization’’ with no set of value other than greed For this kind of organization, governance is just another set of rules to circumvent Stage two is the ‘‘legalistic corporation’’ so named because of the preoccupation it exhibits for compliance with the letter of the law as opposed to its spirit The principal emphasis is still on profitability, but the difference between stage and is that the latter is concerned with the legality of profits, not necessarily with their morality Owners are still the principal stakeholders These organizations are followers and not social leaders Society can expect, for the most part, that they adhere to the rules of statutory governance Contrary to their legalistic counterparts in stage 2, the stage ‘‘responsive corporations’’ begin to develop cultures that contain values other than productivity and a sense of legality Management understands the value of not acting solely on a legal basis This is the case when a firm adopts DM policies thus showing concern for other corporate stakeholders than owners According to Gilbert et al (1999, p 61), ‘‘diversity management is a voluntary organizational program designed to create greater inclusion of all individuals into informal social networks and formal company programs.’’ In order to reach R & R’s fourth stage of CMD, i.e., ‘‘emerging ethical organization,’’ top management and board values must become organizational values or part of the organizational culture This is the first stage to exhibit an active concern for ethical outcomes In R & R’s conceptual model of CMD, the final stage is the ‘‘ethical organization.’’ According to R & R, it is difficult to find organizations which have reached this level of development where ethics is fully integrated in the firm’s mission and organization’s culture and where there is a balanced concern for ethical and economic outcomes This article examines whether the degree of moral or ethical development of a corporation is related to the quality of its financial reporting In order to achieve this objective, we have to isolate the marginal effect of CMD over the governance presumed effect on FRQ We use the stakeholder-oriented policy of promoting diversity and employment equity to proxy for CMD In the next section, we review the empirical literature on diversity and EM Review of empirical literature Despite the presumed role of ethics or CMD as a complement to governance regulation in controlling opportunistic EM behavior, there is a near vacuum of empirical literature on the subject This may be due to the fact that business ethics is more difficult to observe and measure than compliance with governance regulation as proxied for instance by the percentage of unrelated directors We use DM as defined above by Gilbert et al (1999, p 61) to proxy for the level of business ethics or CMD For these authors, ‘‘diversity management (DM) is a voluntary organizational program ….’’ Thus, DM results from a voluntary management decision which does not depend solely on laws, since sheer compliance to affirmative action quotas or targets represents only minimum acceptable standards of behavior ‘‘Ethical behavior focused on diversity management takes knowledge, commitment and work beyond the law’’ Ethics, Diversity Management and Financial Reporting Quality (Gilbert et al., 1999, p 73) As underlined in our theoretical framework, corporate DM development may run parallel to the responsive (R & R’s stage 3) and emerging ethical (R & R’s stage 3) organizations’ moral development stages To our knowledge, one exploratory (Krishnan and Parsons, 2008) and two unpublished studies (Francis et al., 2009; Gul et al., 2007) have started to test the link between a subset of DM, i.e., gender diversity as measured by the proportion of women on boards, and FRQ We contend that the concept of DM is much larger than gender diversity which may be closer to affirmative action (Gilbert et al., 1999) than to business ethics Conceptually, DM is closely related to organizational culture and encompasses the equitable management of several aspects of human resources including gender, race, ethnicity, age, personality, and cognitive style However, as most studies to date have focused on gender diversity, our literature review will mostly focus on that partial view of diversity Much attention has been paid to the diversity of interests between directors and top management and its indirect effect on performance (Francoeur et al., 2008; Levi et al., 2008) This study focuses on both the potential direct and indirect relations between DM and agency costs where managers may take advantage of information asymmetry to fiddle with earnings (right hand side of Fig 1) The board of directors generally oversees at least four important functions (Mallin, 2004; Monks and Minow, 2004) Managerial control and compliance with laws and regulations are mostly related to fiduciary governance (stage of R & R) while questioning, informing, and advising managers, and ensuring good relations with the external environment are mostly related to the advisory role of governance Diversified boards can potentially not only improve their oversight capacity but also the quality of their decisions (Dallas, 2002) through their enlightened questions and advices One of the most significant governance challenges that managers, administrators, and shareholders of the modern company face is establishing an optimal mix within the board of directors in terms of gender, race, and culture (Carter et al., 2003) The business case for DM is closely linked to agency as well as to resource-based theories It suggests that a diversified board increases its 339 independence and activism thus ensuring better control over managers’ behavior (Carter et al., 2003, 2008) Adams (2008) asserts that women directors have an impact similar to the one of independent directors, particularly regarding control over managerial discretion Smith et al (2006) argue that the heterogeneous makeup of top management is an aspect of good CG that helps constrain EM practices Boards of directors that include women members are purportedly better able to improve control and constrain opportunistic EM behaviors (Gul et al., 2007) Furthermore, according to Cohen et al (1998), Klenke (2003), and Trinidad and Normore (2005), women employ a more democratic, trust-based leadership style They also exhibit greater risk aversion in financial decision making (Hinz et al., 1997; Powell and Ansic, 1997; Riley and Chow, 1992; Sunden and Surette, 1998) Betz et al (1989), Mason and Mudrack (1996), and Clikeman et al (2001) find that women exhibit higher ethical values in their decisions than men Earnings may be managed while complying with the rules, but some manipulations may be unethical (Bruns and Merchant, 1990; Gaa, 2007) Opportunistic EM is likely to attract meticulous examination by investors, analysts, and regulators, which increases the risks of litigation and loss of reputation Several studies have shown a strong association between EM and the risk of litigation (DuCharme et al., 2004; Heninger, 2001; Kasznik, 1999) and the loss of corporate reputation (Kaplan and Ravenscroft, 2004; Hunton et al., 2006) Owing to their more pronounced ethical values and greater risk aversion, women directors might be more averse to EM and the above consequences, compared with their male counterparts (Gul et al., 2007) Diversity management may thus affect EM in various ways Diversified, trust-based as opposed to compliance- or obedience-oriented management style implies greater sharing of information among directors, and between directors, top management, and employees This reduction in information asymmetry putatively improves control over the corporate financial reporting function thus minimizing opportunistic EM to camouflage mediocre performance and expropriate shareholders’ wealth Beyond diversity of the board of directors and top management, DM systems and programs related to 340 ´ Real Labelle et al equity and equality in employment are an important dimension of diversity Armstrong et al (2008) posit that diversity and employment equality management policy is part of a High Performance Work System, which improves the quality of work and organizational productivity In 2006, the International Labour Organization (ILO) mentioned that employment equality and employee diversity are some of the characteristics of high performance workplaces In this context, the employees’ perceptions of their organization’s values of ethics and equity motivate them to put forth additional efforts (Lambert, 2000) The increase in employee diversity is a contemporary human resources management strategy whose objective is to generate a strategic advantage for the company (Cox, 1991; Thomas, 1991) and a potential source of organizational efficiency (Miller, 1998) Effective management of diversity could foster creativity, innovation, and problem-solving capacity (Thomas, 1992) DM practices and policies also improve the quality of decision making (Flood et al., 2005) and reinforce the organizational commitment of employees (O’Connell and Russel, 2005) In order to summarize, DM policies purportedly generate a sense of equity and satisfaction in the workplace that provides incentives to act in the company’s interests In that environment, opportunistic EM behavior posing as a risk to undermine the success of the organization is likely to be minimized Thus, we hypothesize that the level of CMD as proxied by DM putatively constrains managerial discretion in EM We, therefore, expect a negative relation between DM and EM while controlling for CG and other FRQ determinants often found to be relevant in the various areas of the accounting choices literature EMit ẳ a1 ỵ a2 DMit1 ỵ a3 CGit1 ỵ a4 CFPit1 ỵ a5 SIZEit1 ỵ a6 DEBTit1 ỵ a7 EXCOMPit1 ỵ a8 RISKit1 þ a9 MBRATIOitÀ1 þ a10 BLOCKitÀ1 þ a11 INDi þ e1 ð3Þ where EM = for firms with high absolute discretionary accruals (DA), and for low absolute DA; DM = JR diversity management score; CG = JR corporate governance score; CFP = corporate financial performance; SIZE = natural logarithm of total assets; DEBT = level of debt; RISK = systematic risk b of the market model; MBRATIO = market to book ratio; EXCOMP = average ratio of bonus to total pay for all executives; BLOCK = cumulative percentage of shares owned by blockholders (>10%); Industry: GOLD = Gold and precious minerals; OIL = Oil and gas; CONS = consumer products; IND = industrial products; COM = communication and media; MERCH = merchandizing The dependent variable (EM) is measured for the period 2005–2006, while the explanatory and control variables are measured for 2004–2005 This is done to avoid any potential endogeneity problem The initial sample consists of all the 160 companies of the CSID for which DM and CG scores are compiled by JR Owing to their particular accounting standards and rules, 41 firms operating in the public and financial services sectors are excluded An additional 41 firms are excluded due to missing data on accounting or stock market The final sample consists of 78 companies or 156 observations over years Dependent variable – financial reporting quality Model development, data collection, and variable measurement In this section, we first present the model and sample, and then explain why the variables were chosen and how they are measured In order to examine the association between DM, our proxy for CMD, and the magnitude of EM, our proxy for the firm’s FRQ, we ran the following panel probit model using Stata software: We use EM through DA to proxy for FRQ DA are estimated using the cross-sectional version of the Jones model modified by Dechow et al (1995) Dechow et al (1995) eliminated the tendency of the Jones’ model to incorrectly measure DA when discretion is exerted on the operating cash flow They adjusted the variations in operating cash flow to take into account the change in accounts receivable during the examination period Jones’ original model Ethics, Diversity Management and Financial Reporting Quality presumes that managerial discretion is not exerted on operating cash flow in the estimation period or in the examination period In contrast, the modified model presumes that all variations in credit sales in the examination period are associated with EM This modification is based mainly on the fact that it is easier to manage earnings by manipulating the recognition of credit sales than that of cash sales The modified version of Jones’ model is therefore expressed as follows:   ỵ a2 DREVt DRECt ị TAt ¼ a1 AtÀ1 341 downward depending on the incentives In order to distinguish high and low DA firms, the absolute values of DA are first sorted in decreasing order for 2005 and 2006 Then, for each year, the sample is divided into two groups of 39 firms whose absolute values of DA fall on either side of the median The group with values higher than the median consists of companies whose magnitude of EM is high, whereas the group whose absolute DA values fall below the median consists of companies exhibiting less EM Independent variable of interest – diversity management ỵ a3 PPEt ỵ eit TA = total accruals = net income (item 75 of the Stock Guide database) less operating cash flow (item 110 of the Stock Guide database); At-1 = total assets (item 94 of the Stock Guide database) at t - 1; DREV = revenues (item 61 of the Stock Guide database) in year t less revenues in year t - scaled by total assets at t - 1; DREC = net receivables (item 85 of the Stock Guide database) in year t less net receivables in year t - scaled by total assets at t - 1; PPE = gross property plant and equipment (item 89 of the Stock Guide database) in year t scaled by total assets at t – All variables are standardized by the amount of total assets at t - to reduce heteroskedasticity Based on the estimated coefficients, we calculate the nondiscretionary accruals (NDA) of the sample as follows:   ỵ ^2 DREVt DRECt ị a a NDAt ẳ ^1 At1 ^ ỵ a3 PPEt As outlined earlier, the concept of DM is harder to observe and measure than gender diversity which is the only element of diversity examined in previous research in relation to EM We thus use the CSID compiled by JR6 for 2004 and 2005 JR is a leading provider of governance and social, such as DM, research for institutional investors JR’s rating of DM is part of an index that investment managers use to integrate DM criteria into their investment decisions As shown in Appendix 1, 75% of the DM rating on 10 concerns the firms’ stakeholder-oriented policies and efforts to recruit and integrate minorities and women in the workplace It includes the firm’s policy on diversity and employment equity, the managerial structure and responsibility, the public reporting on diversity issues, employee training and communication, recruitment, retention and promotion programs, parental benefits, and other diversity initiatives or benefits The percentages of women on the board of directors and among senior officers accounts for 12.5% of the total score each ^ a where a1 , ^2 and ^3 are the estimated coefficients a of a1, a2, and a3, respectively The DA of the sample are measured by the difference between the total accruals and the nondiscretionary accruals: Control variables DAt ¼ TAt À NDAt As proposed by Huddart and Louis (2006), the propensity of a firm to manage earnings (EM) is measured by a dichotomous variable that takes the value of for firms with high absolute DA, and for low absolute DA firms We use the absolute value of accruals as earnings that may be managed upward or Other factors in the governance and accounting choices literatures are known to constitute deterrents (governance, size, and to a lesser extent ownership concentration) or incentives for EM, namely, corporate financial performance (CFP), debt and compensation contracts, growth opportunities, and risk In order to gauge the indirect advisory and direct fiduciary role the board of directors might play in preventing EM (Fig 1), we first include the quality 342 ´ Real Labelle et al of the firm’s governance in the model (Niu, 2006) For that purpose, we use the CSID CG score compiled by JR for the years 2004 and 2005 CG is a composite index, as in the case of DM, measuring corporate fiduciary governance such as the independence of board members from management or the separation of the chairperson and CEO positions, the existence of formal CG principles, of a code of business conduct and concerns about non-voting or multivoting common shares, excessive compensation, and stock option plan dilution The sign of the relation between the firm’s ownership structure and its propensity to more or less manage earnings is uncertain In governance, ownership concentration in the hands of one or more blocks of shareholders (BLOCK) may be seen as another means of controlling executives’ discretion with regard to opportunistic EM behavior (Bushee, 1998; Dempsy et al., 1993) On the other hand, closely held firms may be less concerned with earnings quality than widely held ones, as their shareholders can obtain information directly from the firm (Bushee et al., 2003; Gelb, 2000) Therefore, we control for the firm’s ownership concentration without qualifying its relation with EM We use the Stock Guide database measure, i.e., the cumulative percentage of shares held by company directors and other individuals or institutions holding more than 10% of the share equity This proportion corresponds to the disclosure requirement threshold with regard to ownership In the voluntary disclosure literature, Clarkson et al (1999) and Lang and Lundholm (1993) show that larger firms are generally more forthcoming than smaller ones in terms of financial reporting Size (SIZE) is measured by the natural logarithm of total assets Guay et al (1996) distinguish three perspectives on the relation between performance and managerial discretionary behaviors affecting accruals From a performance perspective, management may use accruals to reduce earnings (-) to enhance their ability to reflect the true underlying performance of the firm From an opportunism perspective, management may use accruals to subvert the ability of earnings to reflect true underlying performance often but not always to portray performance in a more favorable way (+) Most empirical evidence indeed generally indicates that poorly performing firms are more likely to manage earnings (Burgstahler and Dichev, 1997; DeAngelo et al., 1994; Mard, 2004) Finally, from a noise component perspective, accruals may introduce noise into the performance signal (?/+) In order to control for CFP, we use stock market return (STOCKRET) As a sensitivity analysis, we also use two accounting proxies often used in previous research to measure performance: return on assets (ROA) and on shareholders’ equity (ROE) From their extensive review of the literature on accounting choices, Watts and Zimmerman (1986) also assert that firms use DA to avoid violation of accounting-based-debt covenant Consistent with prior empirical work (e.g., Bowen et al 2008), we control for the level of debt We measure this variable as the ratio of long-term debt to total assets (DEBT) Healy (1985), Holthausen et al (1995) and Gaver et al (1995) also identify executive compensation (EXCOMP) as another contractual motivation for EM In this case, earnings could be managed upward to improve an impending bonus, or downward if the manager believes that the firm is not in a position to meet the contractual earnings’ target This is referred to as the ‘‘big bath’’ hypothesis While we have to control for that motivation which is frequently examined in the accounting choice literature, we not specify the direction of the effect of executive compensation on EM In order to proxy for compensation, we use the measure introduced by Park and Shin (2004), namely, the mean ratio (premium/total compensation) of the five most highly paid managers This allows capturing the weight of compensation rather than simply the existence or not of a compensation plan Total compensation is the sum of the salary, premium, present value of stock option plans, value of restricted share grants, long-term incentive compensation, and any other annual components of compensation Given the political costs linked to the company’s risk level, firms with very high risk have a greater incentive to manage earnings (Zmijewski and Hagerman, 1981) In fact, firms with higher risks face more political visibility and use accounting discretion to reduce the risk perception (Warfield et al., 1995) We expect a positive association between risk and EM Following Warfield et al (1995) and RiahiBelkaoui (2003), this variable (RISK) is measured by the systematic risk b of the market model Ethics, Diversity Management and Financial Reporting Quality 343 TABLE I Distribution across industries Industry Metals and minerals (MET) Gold and precious minerals (GOLD) Oil and gas (OIL) Consumer products (CONS) Industrial products (IND) Communication and media (COM) Merchandising (MERCH) Total We also include the Market to Book ratio (MBRATIO) to measure growth opportunities According to Park and Shin (2004, p 443), ‘‘it is easier for fast-growing firms to engage in EM than slow-growing or stagnant firms because it is generally harder to see through the business activities of fastgrowing firms.’’ Lastly, we use industries (IND) as dichotomous variables As there exists mimetism in accounting choices within industries, to examine firms’ EM behavior, we have to control for any differences that may exist between industries The breakdown of observations by industrial sector, as defined by the Toronto Stock Exchange, is presented in Table I Analysis and interpretation of results This section presents the univariate and multivariate statistical analyses of the data and their interpretation Descriptive statistics and univariate analysis Table II presents the descriptive statistics of the continuous independent variables for the total sample (Part A), for highly manipulative (Part B) and weakly manipulative firms (Part C) The results of univariate means comparison tests (Part D) bring to light significant differences between the two groups of firms The DM variable reveals a significant difference between high and low EM firms As expected, the difference in CMD as proxied by DM is in favor of the firms who are less prone to EM It is statistically N % 28 20 30 12 34 10 22 156 17.9 12.8 19.2 7.7 21.8 6.4 14.1 100 significant at the 1% level There is no significant difference as far as the quality of their fiduciary governance is concerned As for other control variables, differences are not significant except in the case of firm performance as measured by stock return (at the 1% level) and growth opportunities as measured by MBRATIO (at the 5% level) In the case of firm performance, the difference is no longer significant when measured in accounting terms (ROA and ROE) When performance is measured in market terms (STOCKRET), high EM firms exhibit on average a significantly stronger financial performance (1%) than low EM ones As inferred by Guay et al (1996), in our sample, management seems to use accruals to reduce earnings to enhance their ability to reflect the true underlying performance of the firm In contrast, high EM firms have on average more growth opportunities (5%) as measured by the MBRATIO than companies that engage in less EM This is consistent with Park and Shin’s (2004) findings about fast-growing firms taking advantage of greater information asymmetry to engage in more EM There is no significant statistical difference between the two groups of companies in terms of size, debt and compensation contracts, risk and existence of a shareholder block Table III presents contingency analyses that integrates dichotomous variables The results indicate that the proportion of companies engaged in EM is significantly higher (lower) in the metals and minerals, oil and gas (consumer products, industrial products and communication, and media sectors) than in other industrial sectors DM CG 14.412 1.369 10.861 17.539 156 SIZE 14.275 1.587 10.861 17.539 78 14.549 1.104 12.257 17.003 78 1.254 0.212 0.376 0.604 -0.467 3.724 156 STOCKRET 0.502 0.661 -0.300 3.724 78 0.250 0.516 -0.467 3.495 78 -2.656 0.0087*** 1.600 0.112 0.206 0.129 0.000 0.565 78 0.172 0.136 0.000 0.627 78 0.189 0.133 0.000 0.627 156 DEBT -0.754 0.452 0.491 0.471 -0.406 1.535 78 0.555 0.586 -0.434 2.613 78 0.523 0.531 -0.434 2.613 156 RISK -0.779 0.437 0.038 0.065 -0.233 0.278 78 0.048 0.099 -0.458 0.205 78 0.043 0.084 -0.458 0.278 156 ROA -1.430 0.155 0.083 0.119 -0.423 0.434 78 0.118 0.179 -0.778 0.536 78 0.101 0.153 -0.778 0.536 156 ROE -2.510 0.0131** 2.363 1.082 0.480 5.710 78 2.944 1.733 0.920 8.370 78 2.653 1.469 0.480 8.370 156 MBRATIO 1.385 0.168 0.296 0.163 0.000 0.768 78 0.259 0.166 0.000 0.777 78 0.278 0.165 0.000 0.777 156 EXCOMP -0.479 0.633 0.207 0.218 0.000 0.693 78 0.225 0.247 0.000 0.753 78 0.216 0.232 0.000 0.753 156 BLOCK DM diversity management score, CG corporate governance score, STOCKRET stock return, SIZE size of firm (total assets), DEBT level of debt, RISK market risk b, ROA return on assets, ROE return on equity, MBRATIO market to book ratio, EXCOMP weight of bonus (average ratio of bonus to total pay for all executives), BLOCK ownership percentage of share blockholders *** and ** two-tailed significance thresholds at and 5% A – Total sample Average 3.133 6.623 St deviation 1.152 1.226 Minimum -0.400 3.300 Maximum 6.600 9.300 N 156 156 B – High earnings management Average 2.871 6.773 St deviation 1.152 1.138 Minimum -0.400 4.100 Maximum 6.200 9.300 N 78 78 C – Low earnings management Average 3.395 6.473 St deviation 1.098 1.299 Minimum 1.700 3.300 Maximum 6.600 8.900 N 78 78 D – Average difference t 2.910 -1.534 Probability 0.0041*** 0.127 Variable TABLE II Descriptive statistics and parametric tests of differences between averages of continuous variables 344 ´ Real Labelle et al Ethics, Diversity Management and Financial Reporting Quality 345 TABLE III Contingency tables and v tests of differences between frequencies of binary independent variables EM * MET EM Total Pearson v2 EM * GOLD EM Total Pearson v2 EM * OIL EM Total Pearson v2 EM * CONS EM Total Pearson v2 EM * IND EM Total Pearson v2 EM * COM EM Total Pearson v2 EM * MERCH MET 70 58 128 Significance level (df = 20 28 1) GOLD 68 68 136 Significance level (df = 10 10 20 1) OIL 77 49 126 Significance level (df = 1 29 30 1) CONS 69 75 144 Significance level (df = 12 1) IND 48 74 122 Significance level (df = 30 34 1) 6.8384 COM 69 77 146 Significance level (df = 10 1) 67 67 6.2679 0.0000 32.3556 3.2500 25.4233 Total Total 78 78 156 Total 78 78 156 0.000*** Total 78 78 156 0.071* Total 78 78 156 0.000*** Total MERCH EM 78 78 156 0.012** 78 78 156 0.009*** Total 11 11 78 78 ´ Real Labelle et al 346 TABLE III continued Total Pearson v2 0.0000 134 22 Significance level (df = 1) 156 EM earnings management, MET metals and minerals, GOLD gold and precious minerals, OIL oil and gas, CONS consumer products, IND industrial products, COM communication and media, MERCH merchandizing ***, **, and * two-tailed significance thresholds at 1, 5, and 10% Table IV shows that the correlation coefficients of the explanatory variables are not that high for being used in a multivariate analysis This finding is confirmed by the VIF ratios shown in Table V Indeed, all the values are less than 10 which is the conventional threshold We note a negative and significant correlation at the 1% level between the DM score and EM, which corroborates, a priori, our hypothesis relative to the negative relation between the level of corporate DM development and the level of managerial discretion exercised with regard to EM Concerning the control variables, we find a positive and significant correlation at the 1% level between the stock market return and EM, which is contrary to expectations relative to poorly performing firms, but may translate firms’ willingness to reflect its true underlying performance On the contrary, consistent with previous financial reporting research, the MBRATIO variable shows a positive and significant correlation coefficient at the 5% level, suggesting that growing firms are more likely to manage earnings Other control variables show insignificant correlation coefficients In the following section, we perform a multivariate analysis to take into account the interactions between these variables of performance (STOCKRET) is used as control variable (model 3) It remains significant at the 10% level when using an accounting measure of performance (models and 2) All three models show good explanatory powers with classification rates of 88.21, 87.79, and 88.37% respectively As market measures are better proxies than accounting measures for economic performance, we interpret these results as corroborating our theoretical framework and hypothesis, whereby firms exhibiting higher CMD by promoting diversity and employment equity at the corporate policy level, in the boardroom and among top management and other employees complement CG and are thus less likely to engage in EM Concerning the control variables, MBRATIO has a positive and statistically significant coefficient at the 1% level for model 3, and at 5% for models and As expected, firms with strong growth opportunities are more likely to take advantage of greater information asymmetry and engage in EM practices Ownership concentration has a positive and weakly significant coefficient at the 10% level for all versions of the model If we interpret this variable in light of our framework, it may indicate that the concentration of equity capital in the hands of blockholders, whether it consist of individuals, families, or institutions, as is common in Canada, does not help preventing EM Multivariate analysis Table VI presents the results of the multivariate panel probit models employed to examine whether there is a relation between DM, our proxy for CMD, and the magnitude of EM, our proxy for the firm’s FRQ As expected in our theoretical framework, there is a negative and significant relation between DM and the magnitude of EM It is significant at the 5% level when a market measure Conclusion and caveats In this article, we propose and test a theoretical framework incorporating Reidenbach and Robin’s (1991) conceptual model of CMD to link governance and business ethics, as proxied by DM, with FRQ, as proxied by the magnitude of EM The level of DM and governance quality are measured in CG SIZE DEBT -0.228*** 0.123 0.142* -0.101 0.497*** 0.279*** -0.128 0.204** 0.021 0.376*** 0.061 -0.270*** -0.200** -0.367*** -0.128 0.063 0.083 0.103 0.223*** 0.018 0.115 0.090 0.128 0.258*** 0.092 0.209*** -0.216*** -0.047 -0.192** -0.062 0.198** -0.249*** -0.124 -0.350*** -0.166** -0.111 0.078 -0.023 0.238*** 0.150* 0.039 0.290*** 0.151* 0.264*** 0.160** DM ROA ROE -0.189** -0.263*** 0.960*** 0.240*** -0.042 -0.061 -0.140* 0.019 0.079 -0.147* 0.137* 0.152* -0.131 0.194** 0.187** RISK 0.068 -0.032 -0.092 -0.140* -0.153* -0.094 STOCKRET MBRATIO EXCOMP BLOCK EM earnings management, DM diversity management score, CG corporate governance score, SIZE size of firm (total assets), DEBT level of debt, RISK market risk b, ROA return on assets, ROE return on equity, STOCKRET stock return, MBRATIO market to book ratio, EXCOMP weight of bonus (average ratio of bonus to total pay for all executives), BLOCK ownership percentage of share blockholders ***, **, and * two-tailed significance thresholds at 1, 5, and 10% EM DM CG SIZE DEBT RISK ROA ROE STOCKRET MBRATIO EXCOMP BLOCK EM Coefficients of correlation between model variables TABLE IV Ethics, Diversity Management and Financial Reporting Quality 347 ´ Real Labelle et al 348 TABLE V Variance inflation factors (VIF) Model 1: CFP = ROA Model 2: CFP = ROE Model 3: CFP = STOCKRET Variable VIF Variable VIF Variable VIF DM CG SIZE DEBT RISK ROA MBRATIO EXCOMP BLOCK GOLD OIL CONS IND COM MERCH Average VIF 1.61 1.35 2.23 1.54 1.91 1.53 1.43 1.22 1.48 2.98 2.21 1.82 2.47 1.76 2.07 1.84 DM CG SIZE DEBT RISK ROE MBRATIO EXCOMP BLOCK GOLD OIL CONS IND COM MERCH Average VIF 1.61 1.36 2.23 1.49 1.96 1.67 1.46 1.22 1.47 3.01 2.19 1.81 2.46 1.76 2.05 1.84 DM CG SIZE DEBT RISK STOCKRET MBRATIO EXCOMP BLOCK GOLD OIL CONS IND COM MERCH Average VIF 1.59 1.36 2.24 1.45 1.76 1.27 1.41 1.22 1.47 2.36 2.13 1.89 2.56 1.83 2.15 1.78 CFP corporate financial performance, DM diversity management score, CG corporate governance score, SIZE size of firm (total assets), DEBT level of debt, RISK market risk b, ROA return on assets, ROE return on equity, STOCKRET stock return, MBRATIO market to book ratio, EXCOMP weight of bonus (average ratio of bonus to total pay for all executives), BLOCK ownership percentage of share blockholders, GOLD gold and precious minerals, OIL oil and gas, CONS consumer products, IND industrial products, COM communication and media, MERCH merchandizing accordance with the ratings of JR, a leading provider of social and governance research for institutional investors This DM score is part of an index developed by JR that investment managers use to integrate DM criteria into their investment decisions Thus, CMD is represented by the firm’s propensity to implement and respect a stakeholder-oriented policy such as promoting diversity and employment equity in their management systems and programs, in their boardroom, and among senior management and other employees We test this relation while controlling for other factors known in the literatures on governance and accounting choices to affect earnings quality Thus, this study aims to contribute to the ethics, governance, and financial reporting literatures In this framework, firms that promote a corporate DM policy which considers all stakeholders instead of focusing only on shareholders’ interests are deemed to develop an organizational culture and ethical val- ues, which lead to greater aversion to EM practices, and its consequences such as potential litigation and reputational loss CMD or corporate DM development is deemed to generate a sense of equity and satisfaction in the workplace that provides incentives to act in the firm’s interests and avoid opportunistic EM behavior that would cause risk undermining its success The more the firm is engaged in promoting and implementing diversity in its governance and management systems as measured by JR’s ratings, the smaller is the expected firm’s EM magnitude Findings are in line with this theoretical framework and support this hypothesis Thus, it appears that firms should go beyond affirmative action not only by increasing diversity in the boardrooms and among employees, but also by developing corporate DM policies as part of the organizational culture Although this study constitutes a serious attempt to answer the call for more archival studies of ethics and diversity by authors such as Gul et al (2007, Ethics, Diversity Management and Financial Reporting Quality 349 TABLE VI Population-averaged probit models for determinants of earnings management Model 1: CFP = ROA Model 2: CFP = ROE Model 3: CFP = STOCKRET Coef C DM CG SIZE DEBT RISK CFP MBRATIO EXCOMP BLOCK GOLD OIL CONS IND COM MERCH N Wald v2 Prob > v2 Classification rate (C statistic) Prob Coef Prob Coef Prob -0.0255 -0.2334 0.0242 0.0106 1.1146 0.1918 0.4881 0.2376 -0.1159 1.0894 -0.7123 1.3039 -1.7365 -1.7974 -2.3392 -0.7476 156 74.48 0.000*** 88.21% 0.989 0.061* 0.799 0.926 0.326 0.488 0.744 0.01** 0.876 0.078* 0.157 0.006*** 0.000*** 0.000*** 0.000*** 0.045** -0.1914 -0.2188 0.01479 0.01306 1.29220 0.2747 0.9777 0.2139 -0.1216 1.0673 -0.4386 1.3988 -1.7193 -1.7722 -2.3421 -0.6927 156 77.11 0.000*** 87.79% 0.914 0.075* 0.875 0.908 0.240 0.327 0.272 0.019** 0.869 0.081* 0.390 0.003*** 0.000*** 0.000*** 0.000*** 0.058* 0.3207 -0.2491 0.0170 0.0046 1.0424 0.1732 -0.149 0.2427 -0.1094 1.1633 -0.9004 1.2338 -1.8528 -1.9051 -2.4730 -0.8771 156 73.76 0.000*** 88.37% 0.859 0.046** 0.860 0.968 0.345 0.509 0.484 0.007*** 0.883 0.062* 0.035** 0.008*** 0.000*** 0.000*** 0.000*** 0.025** The C statistic represents the area under the Receiver Operating Characteristic (ROC) curve CFP corporate financial performance, ROA return on assets, ROE return on equity, STOCKRET stock return, DM diversity management score, CG corporate governance score, SIZE size of firm (total assets), DEBT level of debt, RISK market risk b, MBRATIO market to book ratio, EXCOMP weight of bonus (average ratio of bonus to total pay for all executives), BLOCK ownership percentage of share blockholders, GOLD gold and precious minerals, OIL oil and gas, CONS consumer products, IND industrial products, COM communication and media, MERCH merchandizing ***, **, and * two-tailed significance thresholds at 1, 5, and 10% p 5) and Krishnan and Parsons (2008, pp 67, 74), it may suffer, similar to other large sample studies, from the difficulty to operationalize complex and heterogeneous concepts such as business ethics, CMD, or FRQ Therefore, the results have to be interpreted with caution, but we believe future research could use our framework to examine other proxies for those concepts Our own proxy for CMD, Jantzi’s rating of DM, is representative of the efforts of some institutional investors to whom JR is providing information on DM, and of some legislative initiatives to increase the involvement of women and minorities on boards and in top management It is also in line with the provisions of the Canadian Employment Equity Act (EEA) that favors the hiring and promotion of women and people of minority groups designated by the Act, that have historically been victims of discrimination on the Canadian labor market: visible minorities, people with disabilities, and aboriginal peoples (Chagnon et al., 2004) It also goes beyond compliance with affirmative action and political correctness by taking into consideration the degree to which DM systems and programs are part of the organizational culture ´ Real Labelle et al 350 Appendix See Table VII TABLE VII Diversity management according to Jantzi Research scoring criteria The case of Alcan Score Weight (%) Weighted score Policy on diversity/employment equity Managerial structure and responsibility Public reporting on diversity issues Employee training and communication Recruitment/retention/promotion programs Maternity/parental benefits Other diversity initiatives/benefits Percentage of women on the board Percentage of women among senior officers Diversity controversies Other data Diversity score (out of 10) 2.5 0.0 0.0 4.0 1.1 3.5 2.5 2.2 5.0 10.0 5.0 8.9 5.4 5.4 7.1 10.7 7.1 5.4 12.5 12.5 12.5 12.5 0.2 0.0 0.0 0.3 0.1 0.3 0.1 0.3 0.6 1.3 0.6 3.8 Acknowledgments We acknowledge financial support from the Chair in Governance and Forensic Accounting of HEC Montreal and the CGA Professorship in Strategic Financial Information We are grateful to the participants in the 2009 8th International Conference on Corporate Governance (Florence), to Marinilka B Kimbro for her discussion at the 2009 AAA annual meeting (New York) and especially to the JBE referees for their insightful comments This database was developed in 1992 by Jantzi Research Inc., a firm specializing in the evaluation of corporate social performance of Canadian companies It contains the social and environmental profiles of close to 300 companies that make up the S&P–TSX index Now JR is a member of SiRi, a coalition of 11 research organizations including KLD dedicated to advancing social investment, http://www.jantziresearch.com/ References Notes The issue of corporate disclosures is at the heart of CG and the main focus of recent governance reforms For instance, the complete name of the Sarbanes-Oxley Act is ‘‘An Act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.’’ Except to detect or prevent errors committed in good faith On its website, the European Corporate Governance Institute (http://www.ecgi.org/codes/all_codes.php) is making available the full texts of close to 200 CG codes, principles of CG, or CG reforms worldwide Hereafter R & R See, for instance, the 2001 Saucier report, Canadian Securities Administrators national instrument 58-101 and national policies 58-201 and 52110 Adams, R B and D Ferreira: 2008, ‘Women in the Boardroom and Their Impact on Governance and Performance’, Working paper, Available at SSRN: http://ssrn.com/abstract=1107721 Armstrong, C., P C Flood, J P Guthrie, W Liu, S Maccurtain and T Mkamwa: 2008, New Models of High Performance Work Systems The Business Case for Strategic HRM, Partnership and Diversity and Equality Systems (The Equality Authority and National Centre for Partnership and Performance) Betz, M., L O’Connell and J M Shepard: 1989, ‘Gender Differences in Proclivity for Unethical Behaviour’, Journal of Business Ethics 8(5), 321–324 Bowen, R M., S Rajgopal and M Venkatachalam: 2008, ‘Accounting Discretion, Corporate Governance and Firm Performance’, Contemporary Accounting Research 25(Summer), 351–405 Ethics, Diversity Management and Financial Reporting Quality Bruns, W J Jr and K A Merchant: 1990, ‘The Dangerous Morality of Managing Earnings’, Management Accounting 72(2), 22–25 Burgstahler, D and I Dichev: 1997, ‘Earnings Management to Avoid Decreases and Losses’, Journal of Accounting and Economics 24, 99–126 Bushee, B.: 1998, ‘The Influence of Institutional Investors on Myopic R&D Investment Behaviour’, The Accounting Review 73(3), 305–333 Bushee, B J., D A Matsumoto and G S Miller: 2003, ‘Open Versus Closed Conference Calls: The Determinants and Effects of Broadening Access to Disclosure’, Journal of Accounting and Economics 34(1), 149–180 Carter, D A., F D’Souza, B J Simkins and W G Simpson: 2008, ‘The Diversity of Corporate Board Committees and Financial Performance’, Working paper, available at: http://ssrn.com/abstract=1106698 Carter, D A., B J Simkins and W G Simpson: 2003, ‘Corporate Governance, Board Diversity and Firm Value’, The Financial Review 38, 33–53 Chagnon, R., L Lamarche and F Tougas: 2004, ‘La loi ´ ´ ` canadienne sur l’equite en matiere d’emploi et les femmes: Crier « Victoire » ou crier « Au loup… » ?’, CJWL/RFD 16, 318–341 Clarkson, P M., J L Kao and G D Richardson: 1999, ‘Evidence that Management Discussion and Analysis (MD&A) is a Part of a Firm’s Overall Disclosure Package’, Contemporary Accounting Research 16(1), 111– 134 Clikeman, P M., M A Geiger and B T O’Connell: 2001, ‘Student Perceptions of Earnings Management: The Effects of National Origin and Gender’, Teaching Business Ethics 5(4), 389–410 Cohen, J R., L W Pant and D J Sharp: 1998, ‘The Effect of Gender and Academic Discipline Diversity on the Ethical Evaluations, Ethical Intentions and Ethical Orientation of Potential Public Accounting Recruits’, Accounting Horizons 12(3), 250–270 Cox, T.: 1991, ‘The Multicultural Organization’, Academy of Management Executive 5(2), 34–47 Dallas, L L.: 2002, ‘The New Managerialism and Diversity on Corporate Boards of Directors’, Public Law and Legal Theory Working Paper 38(Spring) (University of San Diego School of Law), p 30, http://ssrn.com/abstract_id=313425 DeAngelo, E., H DeAngelo and Skinner D.: 1994, ‘Accounting Choices of Trouble Companies’, Journal of Accounting and Economics 17(January), 113–143 Dechow, P., R Sloan and A Sweeney: 1995, ‘Detecting Earnings Management’, The Accounting Review 70(2), 193–225 Dempsy, S., H Hunt and N Schroeder: 1993, ‘Earnings Management and Corporate Ownership Structure: An 351 Examination of Extraordinary Item Reporting’, Journal of Business, Finance and Accounting 20, 479–500 DuCharme, L L., P H Malatesta and S E Sefcik: 2004, ‘Earnings Management, Stock Issues, and Shareholder Lawsuits’, Journal of Financial Economics 71(1), 27–49 Flood, P., J Guthrie, W Liu and MacCurtain S.: 2005, High Performance Work Systems in Ireland: The Economic Case (National Centre for Partnership and Performance) Francis, B., I Hasan, J C Park and Q Wu: 2009, ‘Gender Differences in Financial Reporting DecisionMaking: Evidence from Accounting Conservatism’, 2009 FMA Annual Meeting Program, October 21–24, Reno, Nevada ´ Francoeur, C., R Labelle and B Sinclair-Desgagne: 2008, ‘Gender Diversity in Corporate Governance and Top Management’, Journal of Business Ethics 81(1), 83–95 Gaa, J.: 2007, ‘The Ethics of Earnings Management: The Case of Income Smoothing’ Presentation, p 37 Gaver, J J., K M Gaver and J R Austin: 1995, ‘Additional Evidence on Bonus Plans and Income Management’, Journal of Accounting and Economics 19, 3–28 Gelb, D.: 2000, ‘Corporate Signaling with Dividends, Stock Repurchases, and Accounting Disclosures: An Empirical Study’, Journal of Accounting, Auditing & Finance 15(2), 99–120 Gilbert, J., B Stead and J Ivancevich: 1999, ‘Diversity Management, a New Organisational Paradigm’, Journal of Business Ethics 21(1), 61–76 Guay, W R., S P Kothari and R L Watts: 1996, ‘A Market-Based Evaluation of Discretionary Accrual Models’, Journal of Accounting Research 34(Supplement), 83–105 Gul, F A., B Srinidhi and J Tsui: 2007, ‘Do female directors enhance corporate board monitoring? Some evidence from earnings quality’, Working paper, The Hong Kong Polytechnic University He, L., R Labelle, C Piot and D B Thornton: 2009, ‘Board Monitoring, Audit Committee Effectiveness, and Financial Reporting Quality: Review and Synthesis of Empirical Evidence’, Available at SSRN: http://ssrn.com/abstract=1159453 Healy, P M.: 1985, ‘The Effect of Bonus Scheme on Accounting Decisions’, Journal of Accounting and Economics 7, 85–107 Heninger, W G.: 2001, ‘The Association Between Auditor Litigation and Abnormal Accruals’, The Accounting Review 76(1), 111–126 Higgs, D.: 2003, ‘Review of the role and effectiveness of non-executive directors’, On-line document from www.dti.gov.uk/cld/non_execs_review 352 ´ Real Labelle et al Hinz, R P., D D McCarthy and J A Turner: 1997, ‘Are Women Conservative Investors? Gender Differences in Participant-Directed Pension Investments’, in M G Gordon, O S Mitchell and M M Twinney (eds.), Positioning Pensions for the Twenty-first Century (University of Pennsylvania Press, Philadelphia), pp 91–103 Holthausen, R W., D F Larcker and R G Sloan: 1995, ‘Annual Bonus Scheme and the Manipulation of Earnings’, Journal of Accounting and Economics 19, 29–74 Huang, J and D J Kisgen: 2008, ‘Gender Differences in Corporate Financial Decision making’, Unpublished working paper, Boston College Huddart, S and H Louis: 2006, ‘Managerial stock sales and earnings management during the 1990s stock market bubble’, Unpublished working paper, The Smeal College of Business, The Pennsylvania State University Hunton, J E., R Libby and C L Mazza: 2006, ‘Financial Reporting Transparency and Earnings Management’, The Accounting Review 81(1), 135–158 International Labour Office: 2006, ‘High Performance Work Research Project Case Studies’, Available at http:// www.ilo.org/public/english/employment/skills/work place/case/case_toc.htm Kaplan, S E and S P Ravenscroft: 2004, ‘The Reputation Effects of Earnings Management in the Internal Labor Market’, Business Ethics Quarterly 14(3), 453– 478 Kasznik, R.: 1999, ‘On the Association Between Voluntary Disclosure and Earnings Management’, Journal of Accounting Research 37(1), 57–81 Klenke, K.: 2003, ‘Gender Influences in DecisionMaking Processes in Top Management Teams’, Management Decision 41(10), 1024–1034 Kohlberg, L.: 1984, The Psychology of Moral Development (Harper & Row, San Francisco) Krishnan, G V and L M Parsons: 2008, ‘Getting to the Bottom Line: An exploration of Gender and Earnings Quality’, Journal of Business Ethics 78, 65–76 Lambert, S J.: 2000, ‘Added Benefits: The Link Between Work-Life Benefits and Organisational Citizenship Behaviour’, Academy of Management Journal 43(5), 801–815 Lang, M H and R J Lundholm: 1993, ‘Corporate Disclosure Policy and Analyst Behavior’, The Accounting Review 71(4), 467–492 Levi, M., K Li and F Zhang: 2008, ‘Mergers and Acquisitions: The Role of Gender’, Unpublished working paper, University of British Columbia Mallin, C A.: 2004, Corporate Governance (Oxford University Press, Oxford, UK) ´´ ´ ` Mard, Y.: 2004, ‘Les societes francaises cotees gerent-elles ¸ ´ leurs chiffres comptables afin d’eviter les pertes et les ˆ ´ ´ baisses de resultats’, Comptabilite Controle Audit 10(2), 73–98 Mason, E S and P E Mudrack: 1996, ‘Gender and Ethical Orientation: A Test of Gender and Occupational Socialization Theories’, Journal of Business Ethics 15(6), 599–604 Miller, F A.: 1998, ‘Strategic Culture Change: The Door to Achieving High Performance and Inclusion’, Public Personnel Management 27(2), 151–160 Mohan, N J and C R Chen: 2004, ‘Are IPOs Priced Differently Based upon Gender?’, Journal of Behavioral Finance 5, 57–65 Monks, R A G and N Minow: 2004, Corporate Governance, 3rd Edition (Blackwell Publishing Ltd, Malden, MA) Niu, F F.: 2006, ‘Corporate Governance and the Quality of Accounting Earnings: A Canadian Perspective’, International Journal of Managerial Finance 2(4), 302–327 O’Connell, P and H Russell: 2005, Equality at Work? – Workplace Equality Policies, Flexible Working Arrangements and the Quality of Work (The Equality Authority, Dublin), http://www.equality.ie/index.asp?locID= 105&docID=269 Park, Y W and H H Shin: 2004, ‘Board Composition and Earnings Management in Canada’, Journal of Corporate Finance 10, 431–457 Piaget, J.: 1932/1962, The Moral Judgment of the Child (Collier, New York) Powell, M and D Ansic: 1997, ‘Gender Differences in Risk Behaviour in Financial Decision-Making: An Experimental Analysis’, Journal of Economic Psychology 18(6), 605–628 Reidenbach, R E and D P Robin: 1991, ‘A Conceptual Model of Corporate Moral Development’, Journal of Business Ethics 10(4), 273–284 Riahi-Belkaoui, A.: 2003, ‘The Impact of Corporate Social Responsibility on the Informativeness of Earnings and Accounting Choices’, Advances in Environmental Accounting and Management 2, 121–136 Riley, W B and K V Chow: 1992, ‘Asset Allocation and Individual Risk Aversion’, Financial Analyst Journal 48(November/December), 32–37 Smith, N., V Smith and M Verner: 2006, ‘Do Women in Top Management Affect Firm Performance? A Panel Study of 2,500 Danish Firms’, International Journal of Productivity and Performance Management 55(7), 569–593 Sunden, A E and B J Surette: 1998, ‘Gender Differences in the Allocation of Assets in Retirement Savings Plans’, The American Economic Review 88(2), 207–211 Ethics, Diversity Management and Financial Reporting Quality Thomas, R R.: 1991, Beyond Race and Gender: Unleashing the Power of Your Total Work Force by Managing Diversity (American Management Association, New York) Thomas, R.: 1992, ‘Managing Diversity: A Conceptual Framework’, in S E Jackson (ed.), Diversity in the Workplace: Human Resources Initiatives (Guilford, New York), pp 13–35 TIAA-CREF: 1997, TIAA-CREF policy statement on corporate governance (New York) Trinidad, C and A H Normore: 2005, ‘Leadership and Gender: A Dangerous Liaison?’, Leadership & Organization Development Journal 26(7), 574–590 Warfield, T D., J J Wild and K L Wild: 1995, ‘Managerial Ownership, Accounting Choices, and Informativeness of Earnings’, Journal of Accounting and Economics 20(1), 61–91 353 Watts, R L and J L Zimmerman: 1986, Positive Accounting Theory (Prentice Hall, Englewood Cliffs) Zmijewski, M and R Hagerman: 1981, ‘An Income Strategy Approach to the Positive Theory of Accounting Standard Setting/Choice’, Journal of Accounting and Economics 3, 129–149 ´ Real Labelle and Claude Francoeur HEC Montreal, Montreal, QC, Canada E-mail: claude.francoeur@hec.ca Rim Makni Gargouri FSEG Sfax, Sfax, Tunisia ... market model Ethics, Diversity Management and Financial Reporting Quality 343 TABLE I Distribution across industries Industry Metals and minerals (MET) Gold and precious minerals (GOLD) Oil and. .. answer the call for more archival studies of ethics and diversity by authors such as Gul et al (2007, Ethics, Diversity Management and Financial Reporting Quality 349 TABLE VI Population-averaged...336 ´ Real Labelle et al Fig Ethics, diversity management, and financial reporting quality associated with the quality of earnings in various areas of the accounting choices literature are also controlled