Corporate Governance and Earnings Management: Evidence from Listed Firms at Palestine Exchange

Abstract

The agency problem gives an incentive to present corporate governance codes that help reduce the conflict of interest between company owners and managers. This study used corporate governance indicators to assess the relationship between CG and earnings management. Managers use earnings management to overstate or understate the figures to serve their own interests. Data were collected for the 33 sampled companies in this study from the annual reports of the listed companies at the Palestine stock exchange. The modified cross-sectional Jones model was used to define the value of earnings management. The independent variables (CG indicators) were board independence, board size, ownership concentration, CEO duality, and audit quality. In addition, to control variables to account for differences in size and performance of the firm, these variables are company size, return on asset and leverage. By using the regression model, a significant correlation between EM and size for the year 2015 and between EM and ownership concentration, size and return on assets for the year 2016 were found. The overall regression result showed that the model fits with the variable used. The R-squared (coefficient of determination) values showed that approximately 65% and 73% of the variability of earnings management was accounted for by the variables in the model. Contribution/ Originality: This study is one of very few studies to have investigated the relationship between corporate governance and earnings management practiced by Palestinian firms listed at the Palestine Stock Exchange. The findings of the study help explain this phenomenon in an emerging market, given the fact that the code of corporate governance is still relatively new and became effective in 2009.

Board Structure of Corporate Organizations and Earnings Management: Does Size and Independence of Corporate Boards Matter for Nigerian Firms?

“…The above outcome supports the position of Gulzar and Wang (2011) who posit that board independence does not have significant influence on earnings management. Additionally, this current study also find evidence to support the claim that board size may not have significant influence on management's opportunistic behavior (Abed, Al-Attar & Suwaidan, 2012;Abdelkarim & Zuriqi, 2020).…”

“…Notwithstanding, prior research outcomes have remained mixed and contradictory in this regards. For instance, while some studies point that the relationship between earnings management and the size of corporate boards is positive and probably significant (Okougbo & Okike, 2015;Burghleh & Al-Okdeh, 2020); other sets of studies have argued that the subsisting relationship between board size and earnings management is either negative and significant (Obigbemi et al 2016), or not significant (Dao & Ngo, 2020;Abdelkarim & Zuriqi, 2020). This current study is therefore motivated by our observation that despite the contradictory results thus far, there is also no clear delineation of probable reasons for the existing conflicting results even when some of the studies were conducted in the same industrial categories, countries, or regions (Zalata, Tauringana & Tingbani, 2018).…”

“…Noteworthy, earnings management could practically be done through two major waysaccounting methods (inventory valuation techniques, accounting policy and estimation technique/approach etc) and the management of accruals (Priharta & Rahayu, 2019;Abdelkarim & Zuriqi, 2020). Worth mentioning is the fact that whatever method adopted, the management of organizations who were employed as agents to serve as stewards on behalf of the shareholders are practically the ones involved in such acts of earnings management.…”

“…As provided by the applicable governance codes for corporate organizations in Nigeria, board sizes of firms should range from a minimum of five ( 5) members to a maximum of 20 members for banks and discount houses; and 15 members for other categories of public companies (CBN 2014;Obigbemi et.al., 2016). Though with contradictory outcomes in terms of magnitude and directions, there are empirical evidence suggesting either the existence, or as found in other cases, the non existence of a relationship between the sizes of corporate boards and earnings management (Abed, Al-Attar & Suwaidan, 2012;Abdelkarim & Zuriqi, 2020). For instance, studies have reported the existence of negative correlation between earnings management and board size (Abed, Al-Attar & Suwaidan, 2012); whereas, subsisting evidence from the literature also indicates the existence of a positive association between earnings management and board size (Rahman & Ali, 2006).…”

“…Notwithstanding, board independence describes the intensity of independent/non-executive directors presence in corporate boards (Prabowo & Simpson, 2011;Zabri et al, 2016;Rashid 2018). No doubt, the level of independence of corporate boards largely determines the extent of corporate boards' abilities to make independent judgments irrespective of possible conflicting interests between those of shareholders and the management team of their respective organizations (Alshetwi, 2017;Abdelkarim & Zuriqi, 2020). Apparently, the level of objectivity and monitoring capabilities of corporate boards could possibly be strengthened through the constitution of boards with higher proportion of independent/non-executive directors who by their very nature, are external to the organization and less likely to be influenced by companies' management or their representatives (Li, Lu, Mittoo & Zhang, 2015;Fuzi et al, 2016).…”