| The purpose of this study is to examine the degree to which income smoothing and big bath behavior change the probability of early adoption of SFAS 142, Goodwill and other Intangible Assets. Further, this study tests whether effective audit committees alter the degree to which these particular behaviors affect the early adoption decision. This is the first research to examine the association between corporate governance and earnings management through early adoption of mandated accounting changes. Better corporate governance should result in better financial reporting, and this paper tests whether new regulation regarding audit committees is effective against these particular forms of earnings management. Effective audit committees are defined as those which are independent, have frequent meetings, have a high percentage of financial and governance expertise, and have members that are not interlocked with audit committees of other firms served by the same auditor.; Results show that before considering the impact of an effective audit committee, a firm's decision to early adopt is based more on smoothing objectives rather than big bath behavior. Also, frequency of audit committee meetings, financial expertise, and governance expertise are found to change the degree to which smoothing and big bath behavior affect the early adoption decision. |
