Corporate governance and earnings management nexus: Evidence from the UK and Egypt using neural networks

Abstract

Using conventional regressions and generalized regression neural networks (GRNNs), we examine the relationship between corporate governance (CG) and earnings management (EM). We also examine whether governance quality moderates the association between EM and CG for a sample of British and Egyptian companies. Our findings show that: (a) UK firms are likely to have lower levels of EM if they: have smaller boards, are dominated by independent outside directors, and have a low percentage of female directors; (b) Egyptian firms are likely to have lower levels of EM if they: have larger boards, are dominated by independent outside directors, and have a low percentage of female directors; (c) The governance quality (control of corruption)has a significant hidden effect on EM. Since our results provide empirical evidence that the board of directors plays a vital role in mitigating EM, these findings might lead to an improvement in the credibility of financial statements for investors in both the UK and Egypt. As policy implications, our findings inform regulators and policy-makers that corruption has a very strong hidden effect on EM and that they can deter EM by controlling the corruption level in their countries.

Corporate Governance and Earnings Management Nexus: Evidence from the UK and Egypt Using Neural Networks

“…Variables are defined as follows: independent outside directors (PIOD), independent outside directors multiplied by corruption (PIODCORR), board size (BSIZ), board size multiplied by corruption (BSIZZCORR); CEO duality (DUAL), CEO duality multiplied by corruption (DUALCORR), female ratio (BFEM), board female multiplied by corruption (BFEMCORR), corruption used as a proxy for governance quality (Corruption), audit firm size (AUDF), firm size(FSIZ), firm profitability (FPROF), firm capital structure (FCS), firm liquidity (FLIQ), firm growth (FGROW), firm loss (FLOSS). we rely on the random effect model (e.g., Elamer et al, 2017Elamer et al, , 2018Elamer et al, , 2019aElamer et al, , 2019bElghuweel et al, 2017;Ghosh et al, 2010;Huse et al, 2011;van Ees et al, 2009;Zona et al, 2018). Based on the overall sample (Model I) for UK firms, the results support the moderating effect of GQ, showing that firms with a high proportion of independent outside directors multiplied by corruption (PIODCORR) have a negative coefficient (t = −1.80 at the 10% confidence level).…”

“…By contrast, linking insights from a multi-theoretical perspective may offer unique insights towards interpreting and explaining EM in different regulatory and institutional contexts, such as the UK and Egypt. Also, a multitheoretical perspective may facilitate the examination of the potential interactions among BoDs, governance quality and EM (Elamer et al, 2017(Elamer et al, , 2018(Elamer et al, , 2019a(Elamer et al, , 2019bElghuweel et al, 2017;Huse et al, 2011;van Ees et al, 2009;Zona et al, 2018). From this perspective, joint insights from agency, stewardship, resource dependence, information asymmetry, managerial signalling, organizational and stakeholder theories may help in improving the relevance of BoDs and governance quality mechanisms in explaining the varied motivations for engaging in EM.…”

“…While corruption is widespread in emerging economics, there is a growing focus on the degree of its predictability to influence the effective operational of governments and economies (Elamer et al, 2017(Elamer et al, , 2018(Elamer et al, , 2019a(Elamer et al, , 2019b(Elamer et al, , 2020. Elamer et al (2019a) examind the impact of corruption on risk management and disclosure in a sample of MENA banks.…”

“…We firstly use OLS and fixed-effects regression analyses (e.g., Elamer et al, 2017Elamer et al, , 2018Elamer et al, , 2019aElamer et al, , 2019bElghuweel et al, 2017;Ghosh et al, 2010;Huse et al, 2011;van Ees et al, 2009;Zona et al, 2018) to investigate the effect of CG on EM, and to investigate whether this relationship is moderated by governance quality (i.e., control of corruption). Therefore, our regression models to be considered are identified as follows:…”

Social and environmental reporting, sustainable development and institutional voids: Evidence from a developing country

“…Over the last two decades, there have been substantial changes in government and social expectations about the goals that firms should determine (Adhikariparajul et al, 2019;Alnabsha et al, 2018;Gerged et al, 2018Gerged et al, , 2020. This influences criteria that should be employed and reported to ascertain strong and weak corporate performance (Abdou et al, 2020;Elmagrhi et al, 2018;Fontana, 2020;Haque & Ntim, 2018). Thus, social and environmental reporting (SER) has grown substantially (Bux et al, 2020;Farrukh et al, 2020;García-Rodríguez et al, 2013;García-Sánchez et al, 2020;Hoque et al, 2018;Javed et al, 2020;Kowalczyk & Kucharska, 2020;Sharma, 2019).…”