Corporate governance and earnings forecasts accuracy

Abstract

Purpose

This paper aims to extend the research on the Malaysian initial public offering (IPO) management earnings forecasts by examining the impact of corporate governance mechanisms and earnings forecasts accuracy. It seeks to investigate whether effective corporate governance is a credible signal of improving the quality of financial information.

Design/methodology/approach

A sample of 235 IPO companies that went public during the period 1999‐2006 was used. Absolute forecast error was used to proxy for earnings forecast accuracy and to represent financial disclosure quality.

Findings

Companies with a higher percentage of non‐executive directors in the audit committees and larger audit committee size exhibit greater forecast accuracy. The accuracy of IPO earnings forecast is also positively influenced by the use of brand‐name auditor.

Practical implications

The results suggest that effective corporate governance is a credible signal of improving the quality of financial information. The role of audit committee as financial monitors as suggested by the agency theory supports this paper.

Originality/value

The results are consistent with the belief that effective corporate governance is associated with higher financial disclosure quality. The results also support the decisions made by Malaysian regulators such as the Securities Commission to enhance the quality of financial disclosure by revising the Malaysian Code on Corporate Governance to encourage public companies to implement good governance practices such as audit committee independence.

Citation

Ahmad‐Zaluki, N.A. and Nordin Wan‐Hussin, W. (2010), "Corporate governance and earnings forecasts accuracy", Asian Review of Accounting, Vol. 18 No. 1, pp. 50-67. https://doi.org/10.1108/13217341011046006