Corporate Governance and Accruals Earnings Management

Abstract

This study examines the association between corporate governance and accruals earnings management using a corporate governance index consisting of 55 individual corporate governance measures. Prior literature has focused primarily on certain individual corporate governance measures, overlooking the multidimensional character of corporate governance. Based on a sample of firms listed on the Athens, Milan and Madrid Stock Exchanges, we find an inverse relationship between corporate governance and earnings management. Corporate governance provisions seem to constrain the tendency of management to manage earnings leading to higher credibility for financial statements. Additional tests suggest that the negative relationship holds for large and middle capitalization firms but not for the small capitalization sample. In addition, corporate governance provisions limit upwards but not downwards earnings management. This study emphasizes the multilevel character of corporate governance and suggests the usage of comprehensive measures of corporate governance in the academic research. This study also stresses the importance of introducing corporate governance mechanisms in order to ensure the integrity of the financial reporting process. Practitioners are expected to evaluate the corporate governance provisions that each firm has put in place, whereas policy makers are expected to mandate the application of a wide range of corporate governance mechanisms.

Corporate governance, Islamic governance and earnings management in Oman

“…This reveals that Omani listed firms, on average, appear to manage their earnings upwards with average abnormal accruals equal to about 3% of lagged total assets. Overall, the average DA is consistent with the figures reported by a number of past studies (e.g., Mitra and Cready, 2005;Jiang et al, 2008;Lo et al, 2010;Bekiris and Doukakis, 2011). We observe similar wide spreads among the explanatory and control variables.…”

“…Prior studies have examined: (i) the link between CG structures (e.g., board characteristics) and EM (Chung et al, 2002;Klein, 2002;Xie et al, 2003;Davidson et al, 2005;Mitra & Cready, 2005;Lin et al, 2006;Rahman & Ali, 2006;Jaggi & Tsui, 2007;Jiraporn & Gleason, 2007;Bowen et al, 2008;Jiang et al, 2008;Epps & Ismail, 2009;Ghosh et al, 2010;Kent et al, 2010;Lo et al, 2010;Bekiris & Doukakis, 2011;Alves, 2012;Chen & Zhang, 2012;Leventis & Dimitropoulos, 2012;Anglin et al, 2013;Albu & Girbin, 2015); (ii) the effect of gender on EM (Krishnan & Parsons, 2008;Gavious et al, 2012); (iii) the impact of audit firm size on EM (Chia et al, 2007;Francis & Wang, 2008) or audit quality (DeAngelo, 1981); (iv) the effect of terrorists attacks on EM (Iatridis, 2012); and (v) the effect of executive pay on EM (Cornett et al, 2008).…”

“…However, the limited studies that examine the association between firm-level EM and firm-level CG generally report that better-governed firms tend to engage less in EM (e.g., Bekiris et al, 2011;Leventis & Dimitropulos, 2012). Within the Omani corporate setting, Capital Market Authority, Muscat Security…”

“…In transition economies (e.g., China and Russia), however, the primary CG mechanism is often the state/informal networks, whilst in other countries (e.g., India, South Korea and Japan), business groups tend to be the main CG mechanism. Despite these differences in CG arrangements around the world, existing studies have focused disproportionately on evaluating the effect of Anglo-American CG mechanisms on EM to the neglect of the others (Epps & Ismail, 2009;Ghosh et al, 2010;Lo et al, 2010;Bekiris & Doukakis, 2011;Alves, 2012), and thereby arguably impairing current understanding of the impact of CG on EM in different economies.…”

Shareholder Value Implications of Compliance with the German Corporate Governance Code

“…This may lead to moral hazard and adverse selection problems (Charoenwong et al, 2011), which decrease market valuation. Because good corporate governance supposedly mitigates these problems by protecting outside investors against expropriation by corporate insiders (Bekiris and Doukakis, 2011;Zheka, 2005), investors operating in markets with asymmetric information are expected to be more interested in shares of firms that pursue high levels of corporate governance. Almost all EU member states have introduced corporate governance codes into their legal system.…”