ARTICLE

CORPORATE GOVERNANCES ROLE IN MITIGATING EARNINGS MANIPULATIONS EVIDENCE FROM ASIAN ECONOMIES

  1. HOME
  2. ARTICLE

04 Pages : 42-57

http://dx.doi.org/10.31703/ger.2021(VI-IV).04      10.31703/ger.2021(VI-IV).04      Published : Dec 2021

Corporate Governance's Role in Mitigating Earnings Manipulations: Evidence from Asian Economies

Abstract

    The purpose of this research is to examine the relationship between corporate governance and earnings management in Asian emerging economies Pakistan,India, and Malaysia. The annual financial data of 196 listed non-financial firms for ten years (2010 - 2019) was used as a sample of the study. Panel data fixed-effect method was appropriate for this study. The findings of the current study established a negative association between corporate governance attributes (board of directors and the audit committee) and accrual earnings management. Boards and audit committees with the right characteristics boost stakeholder and shareholder loyalty and retention. Corporate governance is getting much significance in developing economies to establish the trust of regulators,investors, and economic analysts in emerging economies.

    Corporate Governance, Audit Committee, Earnings Management, Asian Economies

    (1) Yasar Abbas
    Ph.D. Scholar, International Islamic University, Islamabad, Pakistan.
    (2) Zaheer Abbas
    Associate Professor, International Islamic University, Islamabad, Pakistan
Fulltext PDF

References

  • Agrawal, A., & Chadha, S. (2005). Corporate governance and accounting scandals. The Journal of Law and Economics, 48(2), 371-406
  • Ahmad, M. M., Hunjra, A. I., Islam, F., & Zureigat, Q. (2021). Does asymmetric information affect firm's financing decisions? International Journal of Emerging Markets. https://doi.org/10.1108/ijoem-01- 2021-0086
  • Ahn, S., & Choi, W. (2009). The role of bank monitoring in corporate governance: Evidence from borrowers' earnings management behavior. Journal of Banking & Finance, 33(2), 425-434.
  • Ali, S., Liu, B., & Su, J. J. (2017). Corporate governance and stock liquidity dimensions: Panel evidence from pure order-driven Australian market. International Review of Economics & Finance, 50, 275-304.
  • Al-Thuneibat, A. A., Al-Angari, H. A., & Al-Saad, S. A. (2016). The effect of corporate governance mechanisms on earnings management: Saudi Arabia. Review of International Business and Strategy.
  • Alves, S. M. G. (2011). The effect of the board structure on earnings management: evidence from Portugal. Journal of Financial Reporting and Accounting, 9(2), 141- 160. https://doi.org/10.1108/198525111111 73103
  • Ashbaugh, H., LaFond, R., & Mayhew, B. W. (2003). Do nonaudit services compromise auditor independence? Further evidence. The Accounting Review, 78(3), 611-639.
  • Barako, D. G., Hancock, P., & Izan, H. Y. (2006). Factors influencing voluntary corporate disclosure by Kenyan companies. Corporate Governance: An International Review, 14(2), 107-125.
  • Barton, D., & Wong, S. C. (2004). Asia's governance challenge.
  • Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24.
  • Boubaker, S., & Nguyen, D. K. (2012). Board directors and corporate social responsibility. Palgrave Macmillan.
  • Boubaker, S., & Nguyen, D. K. (2014). Corporate governance and corporate social responsibility: Emerging markets focus. World Scientific.
  • Chung, H., & Kallapur, S. (2003). Client importance, nonaudit services, and abnormal accruals. The Accounting Review, 78(4), 931-955.
  • Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging Markets Review, 15, 1-33.
  • Cohen, J., Krishnamoorthy, G., & Wright, A. M. (2002). Corporate governance and the audit process. Contemporary Accounting Research, 19(4), 573-594.
  • Davidson III, W. N., Xie, B., & Xu, W. (2004). Market reaction to voluntary announcements of audit committee appointments: The effect of financial expertise. Journal of Accounting and Public Policy, 23(4), 279-293.
  • Davidson, R., Goodwin-Stewart, J., & Kent, P. (2005). Internal governance structures and earnings management. Accounting & Finance, 45(2), 241-267.
  • de Andrés-Alonso, P., Cruz, N. M., & Romero-Merino, M. E. (2006). The governance of nonprofit organizations: Empirical evidence from nongovernmental development organizations in Spain. Nonprofit and Voluntary Sector Quarterly, 35(4), 588-604.
  • Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 193-225
  • Dhaliwal, D. A. N., Naiker, V. I. C., & Navissi, F. (2010). The association between accruals quality and the characteristics of accounting experts and mix of expertise on audit committees. Contemporary Accounting Research, 27(3), 787-827.
  • Duh, R.-R., Lee, W.-C., & Lin, C.-C. (2009). Reversing an impairment loss and earnings management: The role of corporate governance. The International Journal of Accounting, 44(2), 113-137.
  • Ebrahim, A. (2007). Earnings management and board activity: An additional evidence. Review of Accounting and Finance.
  • Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. The Journal of Law and Economics, 26(2), 327-349.
  • Ghosh, A., & Moon, D. (2010). Corporate debt financing and earnings quality. Journal of Business Finance & Accounting, 37(5-6), 538-559.
  • Gillan, S. L. (2006). Recent developments in corporate governance: An overview. Elsevier.
  • Glaum, M., Lichtblau, K., & Lindemann, J. (2004). The extent of earnings management in the US and Germany. Journal of International Accounting Research, 3(2), 45-77.
  • Goncharov, I. (2005). Earnings management and its determinants: Closing gaps in empirical accounting research (Vol. 5). Peter Lang Pub Incorporated
  • Gul, F. A., Fung, S. Y. K., & Jaggi, B. (2009). Earnings quality: Some evidence on the role of auditor tenure and auditors' industry expertise. Journal of Accounting and Economics, 47(3), 265-287.
  • Habbash, M., Sindezingue, C., & Salama, A. (2013). The effect of audit committee characteristics on earnings management: Evidence from the United Kingdom. International Journal of Disclosure and Governance, 10(1), 13-38.
  • He, L., Labelle, R., Piot, C., & Thornton, D. B. (2009). Board monitoring, audit committee effectiveness, and financial reporting quality: Review and synthesis of empirical evidence. Journal of Forensic & Investigative Accounting, 1(2).
  • Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383.
  • Hunjra, A. I., Mehmood, R., & Tayachi, T. (2020). How Do Corporate Social Responsibility and Corporate Governance Affect Stock Price Crash Risk? Journal of Risk and Financial Management, 13(2), 30.
  • Huu Nguyen, A., Minh Thi Vu, T., & Truc Thi Doan, Q. (2020). Corporate governance and stock price synchronicity: Empirical evidence from Vietnam. International Journal of Financial Studies, 8(2), 22.
  • Idris, M., Abu Siam, Y., & Nassar, M. (2018). Board independence, earnings management and the moderating effect of family ownership in Jordan. Management & Marketing, 13(2).
  • Jaggi, B., Leung, S., & Gul, F. (2009). Family control, board independence and earnings management: Evidence- based on Hong Kong firms. Journal of Accounting and Public Policy, 28(4), 281-300.
  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
  • Johari, N. H., Saleh, N. M., Jaffar, R., & Hassan, M. S. (2009a). The influence of board independence, competency and ownership on earnings management in Malaysia. International Journal of Economics and Management, 2 (2), 281-306.
  • Kang, W. S., Kilgore, A., & Wright, S. (2011). The effectiveness of audit committees for low‐ and mid‐cap firms. Managerial Auditing Journal, 26(7), 623-650.
  • Kao, L., & Chen, A. (2004). The effects of board characteristics on earnings management. Corporate Ownership & Control, 1(3), 96-107.
  • Kasipillai, J., & Mahenthiran, S. (2013). Deferred taxes, earnings management, and corporate governance: Malaysian evidence. Journal of Contemporary Accounting & Economics, 9(1), 1-18.
  • Klien, A. (2002). Economic determinants of audit committee. The Accounting Review, 77(2), 30-56.
  • Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005a). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163-197.
  • Laksmana, I., Tietz, W., & Yang, Y.-W. (2012). Compensation discussion and analysis (CD&A): Readability and management obfuscation. Journal of Accounting and Public Policy, 31(2), 185-203.
  • Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69(3), 505-527.
  • Li, W., & Li, Q. (2008). Board composition and earnings management. 2008 4th International Conference on Wireless Communications, Networking and Mobile Computing, 1-4.
  • Lin, J. W., & Hwang, M. I. (2010). Audit quality, corporate governance, and earnings management: A meta-analysis. International Journal of Auditing, 14(1), 57-77.
  • Lipton, M., & Lorsch, J. W. (1992). A modest proposal for improved corporate governance. The Business Lawyer, 59-77
  • McNichols, M., & Wilson, G. P. (1988). Evidence of earnings management from the provision for bad debts. Journal of Accounting Research, 1- 31.
  • Mehmood, R., Hunjra, A. I., & Chani, M. I. (2019). The impact of corporate diversification and financial structure on firm performance: Evidence from South Asian countries. Journal of Risk and Financial Management, 12(1), 49.
  • Metawee, A. (2013). The relationship between characteristics of audit committee, board of directors and level of earning management, Evidence from Egypt. Journal of International Business and Finance, 6(1), 1-34.
  • Minghua, G., & Shouli, M. (2002). An empirical analysis of the relationship between independent director system and corporate performance - Concurrently discusses the system environment for Chinese independent directors to exercise the right effectively. Nankai Economic Studies, 2, 64-68.
  • Mohammad, W. M. W., Wasiuzzaman, S., & Salleh, N. M. Z. N. (2016). Board and audit committee effectiveness, ethnic diversification and earnings management: A study of the Malaysian manufacturing sector. Corporate Governance.
  • Nelson, S. P., & Devi, S. (2013). Audit committee experts and earnings quality. Corporate Governance: The International Journal of Business in Society, 13(4), 335-351. https://doi.org/10.1108/cg-02-2011- 0009
  • Park, Y. W., & Shin, H.-H. (2004). Board composition and earnings management in Canada. Journal of Corporate Finance, 10(3), 431-457.
  • Patelli, L., & Prencipe, A. (2007). The relationship between voluntary disclosure and independent directors in the presence of a dominant shareholder. European Accounting Review, 16(1), 5-33.
  • Pearce, J. A., & Zahra, S. A. (1992). Board composition from a strategic contingency perspective. Journal of Management Studies, 29(4), 411-438.
  • Piot, C., & Janin, R. (2007). External auditors, audit committees and earnings management in France. European Accounting Review, 16(2), 429-454.
  • Saleh, N. M., & Ahmed, K. (2005). Earnings management of distressed firms during debt renegotiation. Accounting and Business Research, 35(1), 69-86.
  • Shah, S. Z. A., Zafar, N., & Durrani, T. K. (2009). Board composition and earnings management an empirical evidence from Pakistani Listed Companies. Middle Eastern Finance and Economics, 3(29), 30-44
  • Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737-783.
  • Soliman, M., & Ragab, A. A. (2013). Board of director's attributes and earning management: Evidence from Egypt Proceedings of 6th International Business and Social Sciences Research Conference.
  • Taylor, I., & Smith, K. (2007). United Nations Conference on Trade and Development (UNCTAD). Routledge.
  • Tian, J. J., & Lau, C.-M. (2001). Board composition, leadership structure and performance in Chinese shareholding companies. Asia Pacific Journal of Management, 18(2), 245- 263.
  • Wang, M. (2014). Which types of institutional investors constrain abnormal accruals? Corporate Governance: An International Review, 22(1), 43-67.
  • Xie, B., Davidson III, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: The role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295-316.
  • Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185-211.
  • Yu, F. F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88(2), 245-271.
  • Zahra, S. A., & Pearce, J. A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15(2), 291-334.

Cite this article

APA

    APA : Abbas, Y., & Abbas, Z. (2021). Corporate Governance's Role in Mitigating Earnings Manipulations: Evidence from Asian Economies. Global Economics Review, VI(IV), 42-57. https://doi.org/10.31703/ger.2021(VI-IV).04

CHICAGO

    CHICAGO : Abbas, Yasar, and Zaheer Abbas. 2021. "Corporate Governance's Role in Mitigating Earnings Manipulations: Evidence from Asian Economies." Global Economics Review, VI (IV): 42-57 doi: 10.31703/ger.2021(VI-IV).04

HARVARD

    HARVARD : ABBAS, Y. & ABBAS, Z. 2021. Corporate Governance's Role in Mitigating Earnings Manipulations: Evidence from Asian Economies. Global Economics Review, VI, 42-57.

MHRA

    MHRA : Abbas, Yasar, and Zaheer Abbas. 2021. "Corporate Governance's Role in Mitigating Earnings Manipulations: Evidence from Asian Economies." Global Economics Review, VI: 42-57

MLA

    MLA : Abbas, Yasar, and Zaheer Abbas. "Corporate Governance's Role in Mitigating Earnings Manipulations: Evidence from Asian Economies." Global Economics Review, VI.IV (2021): 42-57 Print.

OXFORD

    OXFORD : Abbas, Yasar and Abbas, Zaheer (2021), "Corporate Governance's Role in Mitigating Earnings Manipulations: Evidence from Asian Economies", Global Economics Review, VI (IV), 42-57

TURABIAN

    TURABIAN : Abbas, Yasar, and Zaheer Abbas. "Corporate Governance's Role in Mitigating Earnings Manipulations: Evidence from Asian Economies." Global Economics Review VI, no. IV (2021): 42-57. https://doi.org/10.31703/ger.2021(VI-IV).04