Corporate governance factors as predictors of earnings management

Abstract

Unlike developed markets, emerging markets like India have greater imperfections, have information asymmetry, and are particularly different in terms of accounting transparency, corruption, and corporate governance (CG). Also, concentrated ownership structure of Indian firms is more conducive for opportunistic earnings management (EM). There has been high incidence of financial frauds and EM in India particularly through related party transactions. The CG regulations were revised and enhanced in the year 2014 but increasing cases of financial frauds and CG violations indicate insufficiency of CG laws in the country. Linking CG to financial information in a context where investor protection laws are still evolving is important. The contributions of the present study are: first, it assesses earnings quality (EQ) as a key outcome of EM to confirm, in the Indian context, one of the two opposing perspectives of EM, namely opportunistic and informational. Second, it creates empirical evidence on those firm attributes and CG mechanisms which can predict EQ for investors in India. Third, it provides inputs on the effectiveness of the revised regulations in controlling EM, and finally, it puts forward theoretical rationale for EM and CG practices in India.

Does Earnings Quality Affect Companies’ Performance? New Evidence from the Jordanian Market

“…Kent et al (2016) measured EQ by capturing earnings manipulation and the uncertainty of accruals, and this measurement is supported by Dechow and Dichev (2002), Francis et al (2005), Jones et al (2008), and Dechow et al (2010). Beyer et al (2019) measured EQ by predicting about the time-series properties of financial information and reporting bias (Wasan & Mulchandani, 2020). Mehrani et al (2017) discussed that we can measure the EQ by earnings response coefficient, discretionary accruals, predictive value of earnings, conservatism, and real earnings management.…”

“…Regarding the measurement of earnings quality as an independent variable, the prior studies disagree about the measurement of earnings quality (Srinidhi et al, 2011;Beyer et al, 2019;Wasan & Mulchandani, 2020). Srinidhi et al (2011) measured EQ by current discretionary accruals which are related to financial statements.…”

Earnings Quality as a link between Corporate Governance Implementation and Firm Performance

“…Hamdan (2020b) reveals that audit committee persistence/meeting has no impact on earnings quality. On the other hand, Wasan and Mulchandani (2019) showed that the frequency of audit committee meetings affects earnings quality. The more active they participate in meetings, the more effective the complaint committee is and the better the quality of earnings reported by management.…”

Corporate Governance Mechanisms and Real Earnings Management: Evidence from Indonesia

“…The agency approach shows that the existence of an independent commissioner in the board of commissioner structure is a key feature of an effective corporate governance framework [25] and can reduce agency costs arising from the separation of ownership and control. Independent commissioners can carry out monitoring effectively [26], [27], thereby increasing earnings quality by reducing opportunities for earnings management and fraud actions by people in the company [28]. [29] found that the existence of independent commissioners in companies in the UK was able to suppress earnings management levels with real activities.…”