Barton (2001) and Pincus and Rajgopal (2002) show that earnings management through discretionary accruals and derivative hedging are partial substitutes in smoothing earnings before 1999. In this study, we investigate whether Financial Accounting Standard (FAS) 133 regarding hedge accounting in 2000 has influenced the relative merit of the two earnings-smoothing methods. Based on a sample of S&P 500 nonfinancial firms during 1996–2006, we find that the substitution relation between derivative hedging and discretionary accrual is significantly attenuated after FAS 133 implementation. We also document a significant increase in earnings volatility associated with derivative hedging post-FAS 133. These results are robust to the use of various model and method specifications, as well as controlling for contemporaneous macroeconomic and regulatory shocks. Overall, our results suggest that a material change in an accounting rule regarding derivatives can influence the level and volatility of reported earnings, as well as the method of income smoothing.

This research examines the relationship between co-opted boards and firms' anti-takeover provisions (ATPs). Analyzing 5585 US firm-year observations for the period 2012–2022, we document a positive relationship between co-opted boards and ATPs. We further illustrate that the positive relationship is stronger in firms that exhibit subpar performance and compensate senior executives and directors more than the industry average. Furthermore, our research finds that good governance, board and executive gender diversity, gender equality, and board cultural diversity moderate the positive relationship between co-opted boards and ATPs. Our results remain robust across a battery of tests. The findings of this research have important implications for corporate boards and managers. The study contributes to the mainstream agency theory by demonstrating that co-opted boards exacerbate firms' agency problems by blocking the potential of external disciplinary mechanisms.