The Impact of Corporate Governance Mechanisms on Earnings Management: A Case of Indian Stock Exchange Listed Companies

Abstract

The present study contributes to literature by investigating the impact of corporate governance practices on earnings management. To achieve the objectives of this study, we analysed a sample of 50 large capitalization companies from 10 different sectors viz. automotive, oil and gas, pharmaceuticals, cement/construction, chemical, real estate/ retail, food and beverage, technology, engineering and metals and mining listed on BSE for the period 2005–06 to 2015–16. Corporate governance has been quantified through its different attributes, i.e., board size, board committee meeting frequency, board independence, role duality (CEO/chairman), audit committee meeting frequency and audit committee independence. Earnings management is measured by discretionary accruals calculated using modified Jones model developed by Dechow, Sloan and Sweeney (1995). Empirical findings of overall analysis reveal that board size and earnings management are negatively associated whereas board meeting frequency is positively associated with earnings management. In the sector-wise analysis, impact of corporate governance in constraining earnings management was found to be relatively higher and consistent in Oil and Gas sector and Technology sector as compared to other sectors. The findings of the study have important policy implications as they encourage adopting corporate governance practices in firms in order to mitigate earnings management.

Audit Committee Effectiveness and Earnings Management Among Publicly Listed Firms in Kenya

“…Earnings management was measured using discretionary accruals primarily as suggested by the modified jones model developed by Dechow, Sloan, and Sweeney (1995). Accrual is the difference between the reported earnings and cash earnings during the period (Singh et al, 2016). According to Healy (1985), accruals are further broken down into non-discretionary and discretionary (NDA + DA), where non-discretionary accruals are the accounting adjustments made by the management on the firm's cash flows and is mandated by the accounting standard-setting bodies, while discretionary accruals refers to the cash flow changes selected by the management.…”

“…Refers to the gross property plant and equipment at the end of year t ∝ 1 , ∝ 2 and ∝ 3 are the firm-specific parameters DAit is the Discretionary Accruals for firm i for year t Total accruals are the Net income less cash flow from operating activities Audit Committee Independence (ACI) is defined as the presence of independent directors in the audit committee (Singh et al, 2016) and was measured by the total number of independent audit committee directors divided by the total number of directors participating in the audit committee (Al-dhamari, Ismail, & Izah, 2017;Ali Shah, Butt, & Hassan, 2009;Klein, 2002;Mohamed Yunos, Ismail, & Smith, 2012;Singh et al, 2016).…”

“…Audit Committee Independence refers to the presence of independent directors in the audit committee (Singh et al, 2016). An audit committee should work free of any internal or external influence since the oversight organ within the firm.…”

“…Financial analysts, regulators, and accounting experts have been increasingly concerned about the probity of financial statements, mainly after a sequence of high-profile accounting scandals and inconspicuous fraud companies (Singh, Aggarwal, & Anand, 2016). Management engages in opportunistic accruals management to achieve their benefits such as pay-for-performance incentives for retention purposes and to portray a good image shortly before retirement.…”

“…Chen, Elder, & Hsieh, 2007;Huang, Mishra, & Raghunandan, 2007;Jaggi, Leung, & Gul, 2009;Jaggi & Tsui, 2007;Kim & Yi, 2006;Peasnell, Pope, & Young, 2005). Singh et al (2016) Quantified corporate governance by its various attributes, such as the size of the board, the board meetings frequency, the independence of the board, the duality of positions (CEO /chair), the rate of audit committee meetings and the independence of the audit committee. Earnings management has been documented differently by extant literary works, particularly on the role of the audit committees' effectiveness in constraining such opportunistic behavior of the management.…”