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

Marion R. Hutchinson (School of Accountancy, Queensland University of Technology, Brisbane, Australia)
Majella Percy (School of Accountancy, Queensland University of Technology, Brisbane, Australia)
Leyal Erkurtoglu (Ernst and Young, Doha, Qatar)

Accounting Research Journal

ISSN: 1030-9616

Article publication date: 14 November 2008

3493

Abstract

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 Australian Stock Exchange (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 Corporate Governance Council (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 (AC) 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, AC effectiveness and executive directors' shareholding and the association with earnings management.

Keywords

Citation

Hutchinson, M.R., Percy, M. and Erkurtoglu, L. (2008), "An investigation of the association between corporate governance, earnings management and the effect of governance reforms", Accounting Research Journal, Vol. 21 No. 3, pp. 239-262. https://doi.org/10.1108/10309610810922495

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited

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