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An investigation of the association between corporate governance, earnings management and the effect of governance reforms

Author

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  • Marion R. Hutchinson
  • Majella Percy
  • Leyal Erkurtoglu

Abstract

Purpose - The purpose of this study is to examine the impact of recent corporate governance reforms on the association between governance practices and earnings management. Design/methodology/approach - This study examines the impact of corporate governance reforms by using a firm fixed‐effect, cross‐sectional analysis of 200 firms listed on the Australian Stock Exchange (ASX) for the financial years ending in 2000 and 2005. This paper examines the association between firms' corporate governance practices and the quality of financial reports as measured by the magnitude of earnings management pre‐ and post‐the governance reforms (CLERP 9 and ASX Corporate Governance Council (CGC)). Findings - The results of this study indicate that certain governance practices are important in limiting earnings management. In particular, board independence and audit committee (AC) independence, are associated with lower performance‐adjusted discretionary accruals, one commonly used measure of earnings management. However, increasing executive shareholdings provides incentives to manage earnings. Practical implications - This study is important to investors, academics and policy makers as it demonstrates that governance reforms that encourage firms to adopt better governance practices reduces the likelihood of earnings management. Originality/value - There is limited research on the association between corporate governance practices or the recent corporate governance reforms (ASX CGC Recommendations and CLERP 9) on earnings management in Australia. This study extends the literature by demonstrating the impact of recent corporate governance reforms on board independence, AC effectiveness and executive directors' shareholding and the association with earnings management.

Suggested Citation

  • Marion R. Hutchinson & Majella Percy & Leyal Erkurtoglu, 2008. "An investigation of the association between corporate governance, earnings management and the effect of governance reforms," Accounting Research Journal, Emerald Group Publishing Limited, vol. 21(3), pages 239-262, November.
    • Handle: RePEc:eme:arjpps:v:21:y:2008:i:3:p:239-262
    DOI: 10.1108/10309610810922495
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    Citations

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    Cited by:

    1. Pornsit Jiraporn & Pandej Chintrakarn & Shenghui Tong & Sirimon Treepongkaruna, 2018. "Does board independence substitute for external audit quality? Evidence from an exogenous regulatory shock," Australian Journal of Management, Australian School of Business, vol. 43(1), pages 27-41, February.
    2. Kalinga Jagoda & Patrick Wojcik, 2019. "Implementation of risk management and corporate sustainability in the Canadian oil and gas industry," Accounting Research Journal, Emerald Group Publishing Limited, vol. 32(3), pages 381-398, September.
    3. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.
    4. Hussein A. Abdou & Nouran N. Ellelly & Ahmed A. Elamer & Khaled Hussainey & Hassan Yazdifar, 2021. "Corporate governance and earnings management nexus: Evidence from the UK and Egypt using neural networks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6281-6311, October.
    5. Mawuena Akosua Kukah & Mohammed Amidu & Joshua Yindenaba Abor, 2016. "Corporate governance mechanisms and accounting information quality of listed firms in Ghana," African Journal of Accounting, Auditing and Finance, Inderscience Enterprises Ltd, vol. 5(1), pages 38-58.
    6. Mohammad Tareq & Muhammad Nurul Houqe & Tony van Zijl, 2021. "Governance of tunnelling in developing countries: evidence from Bangladesh," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3031-3051, June.
    7. David T. Tan & Larelle Chapple & Kathleen D. Walsh, 2017. "Corporate fraud culture: Re-examining the corporate governance and performance relation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(2), pages 597-620, June.
    8. Nimisha Kapoor & Sandeep Goel, 2017. "Board Characteristics, Firm Profitability and Earnings Management: Evidence from India," Australian Accounting Review, CPA Australia, vol. 27(2), pages 180-194, June.
    9. Muniandy, Balachandran & Hillier, John, 2015. "Board independence, investment opportunity set and performance of South African firms," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 108-124.
    10. Mark Wilson, 2011. "Earnings Management in Australian Corporations," Australian Accounting Review, CPA Australia, vol. 21(3), pages 205-221, September.
    11. Millicent Chang & Andrew B. Jackson & Marvin Wee, 2018. "A review of research on regulation changes in the Asia‐Pacific region," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(3), pages 635-667, September.

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