Effect of audit committee independence, board ethnicity and family ownership on earnings management in Malaysia

Abstract

Purpose The purpose of this paper is to investigate the effect of audit committee independence, board ethnicity and family ownership on earnings management in Malaysia. Design/methodology/approach The effect of audit committee independence, board ethnicity and family ownership on corporate governance is investigated via 1,206 firm-year observations between the fiscal years of 2004 and 2009 of Bursa Malaysia listed firms. Panel data regression analysis is used to analyze the relationship. Findings The findings of this study fail to associate the role of audit committee independence as proposed under RMCCG (2007) in curtailing earnings management activities, thus supporting the findings on power distance scores that power granted to the top management may result in less effective independent directors. Nonetheless, in support of the alignment effect theory, family ownership is found to reduce earnings management activities. The findings show that corporate governance is more effective in developing country family firms due to their long history of family reputation and the importance of institutional culture factors. Research limitations/implications This study focuses on board ethnicity, family ownership and its influence on earnings management. Originality/value This study offers insights into the importance of family institutional structures on corporate governance reforms in Malaysia as Malaysian family firms are mostly traditional firms that have built their reputation and strength in the industry for many generations.

Family ownership concentration and real earnings management: Empirical evidence from an emerging market

“…In the additional analyses, the results remain the same at different percentages of family ownership concentration, using individual REM measurement and alternative regression estimation. The findings are in line with the results of recent studies that provide evidence for the positive role of family ownership in reducing EM and producing high-quality financial reporting (Achleitner et al, 2014;Boonlert-U-Thai & Sen, 2019;Hashmi et al, 2018;Mohammad & Wasiuzzaman, 2020). However, they contradict the findings of previous studies which suggest that family firms are associated with higher REM (Eng et al, 2019;Razzaque et al, 2016).…”

The impact of IFRS on earnings management: evidence from Mexico

“…see Doidge et al, 2004). Alternatively, since family owners have long ownership time horizons and control their firms, the incentives for earnings management in family firms could be lower as found by Mohammad and Wasiuzzaman (2020) in their study of Malaysia.…”

Investment in outside governance monitoring and real earnings management: evidence from an emerging market

“…Prior studies in Malaysia reported that REM is prevalent (Abdul Latif et al, 2016;Enomoto et al, 2015;Kalgo et al, 2019;Nasir et al, 2018;Rahmat et al, 2020;Salleh, 2009). They extensively investigated the effect of corporate governance characteristics on EM practices and the findings show inconsistent results (Al-Rassas and Kamardin, 2016;Mohammad et al, 2016;Mohammad and Wasiuzzaman, 2020), suggesting that governance monitoring in Malaysian companies is currently inadequate in mitigating EM (Mohammad Investment in outside governance monitoring et al, 2016). This could be because companies comply with the corporate governance regulations only by establishing symbolic governance mechanisms (Abdul Latiff and Taib, 2011;Abdullah, 2006), which might be ineffective (Abdullah, 2006;Mohammad et al, 2016).…”