Linking earnings management practices and corporate governance system with the firms’ financial performance

Abstract

Purpose In the shadow of global financial crisis, practice of earnings management can be hazardous for the growth and development of an economy, especially for a developing economy like India. This empirical study is performed to analyse the presence of earnings management practices in Indian public and private commercial banking industry. This study also aims at developing a framework for the three-way relationship existing between the variables of corporate governance, earnings management practices and firm performance. Design/methodology/approach Data have been collected for a period of 11 financial years (2003-2013) from Prowess (Centre for Monitoring Indian Economy) 4.14 database. A bank-based accrual model has been used for calculating earnings management practices. OLS regression has been used for analysing degree of interdependence among variables of corporate governance, earnings management practices and financial performance. Findings The analysis supports the fact that there is the existence of income increasing earnings management practices in Indian commercial banks. It is also observed that corporate government practices (viz. board characteristics, audit practices and performance-based remuneration) basically work as restricting variables for earnings management practices. It is evident from the analysis that market-based firm performance variables (viz. PE ratio, yield and profit after tax) are significantly related to earnings management and corporate governance system. Practical implications The finding of this study will help in monitoring and controlling fraudulent earnings management practices existing in Indian commercial banks. Originality/value This study is the initial research about the presence of earnings management practices in Indian commercial banks.

Corporate Governance, Political Connections, and Bank Performance

“…The presence of INDs is important for performing a better monitoring role, which helps to achieve a higher profitability, as suggested by agency theory . Board independence as a vital corporate governance attribute promotes profitable growth through positively influencing the performance of banks (Kumari and Pattanayak 2017). Financial performance can be attained with a more independent board (Dalton et al 1998), as it performs a better monitoring role (Carter et al 2010) because independent directors are alleged to be effective monitors (Adams et al 2010).…”

“…This suggests that, in order to establish an effective corporate governance framework, director compensation is essential (Chang et al 2015), because investment in human capital is one of the main drivers which helps to achieve the sustainable growth of banks (Nawaz 2017). Therefore, director compensation helps to improve the performance of banks (Kumari and Pattanayak 2017). Moreover, director compensation also helps to minimize agency problems, because directors act as the agents of shareholders (principals) in order to protect and maximize their wealth.…”

Intellectual Capital Disclosures and Corporate Governance in Gaining the Firms’ Non-Discretionary Profits and Market Value in ASEAN-5

“…A good CG can build credibility, transparency, and accountability that enhances firm performance. A strong CG structure will also control managerial decision-making and improve financial reporting quality, thereby increasing firm value (Kumari & Pattanayak, 2017). In its implementation, CG must recognize the rights of shareholders, including employees, suppliers and customers (Kolsi & Grassa, 2017).…”

“…Agency theory also suggests that a firm needs to invent a CG mechanism that pushes behavior to align with the result as desired by the owner (Bendickson et al, 2016). Kumari and Pattanayak (2017) found that weak CG and EM practices are the initial signs that point to the weakening of the firm's financial health and increased risk of bankruptcy. Daghsni et al (2016) found a negative association between CG and NDNI, while Buniamin et al (2012) discovered a positive relationship between CG and EM through DA, where a large number of women on board can increase DA.…”

“…The number of women on board (BGEN) can affect the quality of voluntary disclosure in financial reporting, resulting in a higher firm share price (Fidanoski et al, 2014;Anifowose et al, 2017). The research by Kumari and Pattanayak (2017) stated that BIND affects market performance and improves sustainable business growth. The hypotheses are as follows:…”