1 Free cash flow and earnings management: The moderating role of governance and ownership Mehdi Nekhili University of Reims Champagne-Ardenne – France ICD International Business School Email: mehdi.nekhili@univ-reims.fr Ines Fakhfakh Ben Amar Université de Sfax Institut Supérieur d’Administration des Affaires de Sfax – Tunisia Email : fakhfakh_ines@yahoo.fr Tawhid Chtioui ICD International Business School Email: tchtioui@groupe-igs.fr Faten Lakhal Institut Supérieur de Gestion, Sousse, Tunisia IRG, Université Paris-Est Créteil Val de Marne, France Email: lakhal@u-pec.fr Abstract Purpose – The purpose of this paper is to analyze the moderating effect of corporate governance and ownership features in lessening earnings management practices in a free cash flow (FCF) situation. Design/methodology/approach – A simultaneous equations model is developed to address endogeneity of the FCF variable. The Hausman test indicates that 3SLS is better specified than the 2SLS estimate. Findings – Based on a sample of French companies belonging to the SBF 120 index from 2001 to 2010, the results highlight the opportunistic behavior of managers in presence of free cash flows. Particularly, managers engage in earnings management practices that increase reported earnings. Our results also show that corporate governance mechanisms such as audit committee independence and external audit quality, in addition to institutional investors and managerial ownership reduce the extent of earnings management. Corporate governance mechanisms are substitutive in their monitoring role of managers’ behavior to reduce earnings management in presence of a free cash flow problem. Research implications – This research has relevant implications for investors, reformers, regulators and governance experts who prerequisite understandings about related type of agency problems that may arise in French context. Originality/value – To the best to our knowledge, this is the first paper to systematically test the relationship between FCF and earning management practices in the French context. It also examines the moderating effect of corporate governance and ownership structure on this relationship. Moreover, FCF is endogenously explained by several firm’s characteristics. Keywords: Free cash flow; Earnings management; Corporate governance; Ownership structure. Paper type Research paper