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Abstract This study investigates the role of subordinate managers in monitoring myopic CEOs’ actions to mitigate the earnings management practices. Subordinate managers have longer horizon in the firm compared to the CEO and they have the power to withdraw their contributions to the firm, which will negatively affect the generation of cash flow in the current period. In this study, the researcher uses the mean age difference between the top four subordinate managers and the incumbent CEO as a proxy for the difference in appropriation horizon between the CEO and his/her subordinates. The findings suggest that internal governance, exercised by subordinate managers, can reduce the earnings management of the firm. In addition, the researcher finds that as the CEO age (CEO horizon) increase (decrease); it is more likely that the CEO will manage earnings. Furthermore, the results show a negative relationship between subordinate managers’ power and earnings management. These results suggest that the powerful subordinate managers can provide effective monitoring to constrain and counterbalance the potential self-serving actions of the CEOs, otherwise, their ability to monitor the CEO is weak and internal governance would be less effective. Moreover, the researcher shows that internal monitoring is more effective in firms that require a higher degree of firm specific knowledge and skills. The findings are robust after controlling for other governance mechanisms and across different earnings management models and internal governance measures. |