An investigation of the association between corporate governance, earnings management and the effect of governance reforms

Hutchinson, Marion R., Percy, Majella, & Erkurtoglu, Leyal (2008) An investigation of the association between corporate governance, earnings management and the effect of governance reforms. Accounting Research Journal, 21(3), pp. 239-262.

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Purpose - The purpose of this study is to examine the impact of recent corporate governance reforms on the association between governance practices and earnings management.

Design/methodology/approach - This study examines the impact of corporate governance reforms by using a firm fixed-effect, cross-sectional analysis of 200 firms listed on the ASX for the financial years ending in 2000 and 2005. This paper examines the association between firms' corporate governance practices and the quality of financial reports as measured by the magnitude of earnings management pre-and post- the governance reforms (CLERP 9 and ASX CGC).

Findings - The results of this study indicate that certain governance practices are important in limiting earnings management. In particular, board independence and audit committee independence, are associated with lower performance-adjusted discretionary accruals, one commonly used measure of earnings management. However, increasing executive shareholdings provides incentives to manage earnings.

Practical implications – This study is important to investors, academics and policy makers as it demonstrates that governance reforms that encourage firms to adopt better governance practices reduces the likelihood of earnings management.

Originality/value - There is limited research on the association between corporate governance practices or the recent corporate governance reforms (ASX CGC Recommendations and CLERP 9) on earnings management in Australia. This study extends the literature by demonstrating the impact of recent corporate governance reforms on board independence, audit committee effectiveness and executive directors’ shareholding and the association with earnings management.

Impact and interest:

16 citations in Scopus
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ID Code: 15060
Item Type: Journal Article
Refereed: Yes
Additional URLs:
Keywords: Earnings management, insider share ownership, corporate governance practices and reforms
DOI: 10.1108/10309610810922495
ISSN: 1030-9616
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > ACCOUNTING AUDITING AND ACCOUNTABILITY (150100)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2008 Emerald
Copyright Statement: Reproduced in accordance with the copyright policy of the publisher.
Deposited On: 09 Oct 2008 00:00
Last Modified: 29 Feb 2012 13:42

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