Earnings Management and Corporate Governance in Asia's Emerging Markets

Abstract

This paper studies the impacts of corporate governance on earnings management. We use firm-level governance data, taken from Credit Lyonnais Security Asia (CLSA), of nine Asian countries, in addition to the country-level governance data used in past studies. Our conclusion is as follows. First, firms with good corporate governance tend to conduct less earnings management. Second, there is a size effect for earnings smoothing, that is, large size firms are prone to conduct earnings smoothing, but good corporate governance can mitigate the effect on average. Third, there is a turning point for leverage effect, i.e. when the governance index is large, leverage effect exists, otherwise reverse leverage effect exists. It shows that a highly leveraged firm with poor governance is prone to be scrutinised closely and thus finds it harder to fool the market by manipulating earnings. Fourth, firms with higher growth (lower earnings yield) are prone to engage in earnings smoothing and earnings aggressiveness, but good corporate governance can mitigate the effect. Finally, firms in stronger anti-director rights countries tend to exhibit stronger earnings smoothing. This counter-intuitive result is different from Leuz et al. (2003).

Corporate Governance and Earnings Management: Jordanian Evidence

“…For example, Klein (2002) found that firms with boards and/or audit committees composed of independent directors are less likely to have larger abnormal accruals. In the same manner, Shen and Chih (2007) found that effective corporate governance mechanism tend to conduct less earnings management. Additionally, Abdul Rahman and Ali (2006) and Epps and Ismail (2008) confirmed that board characteristics are important determinants of earnings management.…”

Exploring the Impact of Internal Corporate Governance on the Relation Between Disclosure Quality and Earnings Management in the UK Listed Companies

“…Literature on disclosure quality and earnings management proxies for disclosure quality ranges to AIMR ratings (Zhou and Lobo 2001), disclosure index and compliance to accounting standards (Lapointe-Antunes et al 2006;Shen and Chih 2007), voluntary disclosure (Iatridis and Kadorinis 2009) and press releases by the firms (Jo and Kim 2007;Riahi and Arab 2011) etc. These studies in the US, Switzerland, Tunisia and the UK capital market have consistently documented a negative relationship between disclosure quality and earnings management.…”

“…Prior studies argue that earnings management is dependent on the extent of a firm's disclosure transparency (Jo and Kim 2007) and corporate governance (Shen and Chih 2007). Disclosure and corporate governance are monitoring tools that operate within a firm's governance system, and which are potentially useful for reducing information asymmetry and reducing agency cost (Hope and Thomas 2008;Holm and Schøler 2010;Arcot and Bruno 2011).…”

Corporate governance, accounting and finance: A review

“…The CLSA score rates firms on their management discipline, transparency, independence, accountability, responsibility, fairness and social awareness. Shen and Chih (2007) use CG data from the CLSA for 9 Asian countries (Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand) and find firms with better CG have less earnings management and less earnings smoothing. Other evidence of earnings smoothing is provided in a study of Taiwanese firms' use of reversal of impairment losses between 2005 and 2007 after the introduction of IAS 36, Impairment of Assets.…”