Does corporate governance influence earnings management in listed companies in Bahrain Bourse?

Abstract

Purpose

This paper aims to consider data for listed companies in Bahrain Bourse to determine whether companies practice earnings management (EM). Further, the effect of a set of corporate governance characteristics on EM practices is examined.

Design/methodology/approach

The EM level was measured using discretionary accruals (DA) [calculated using the Modified Jones (1995) Model]. The study sample consisted of 20 companies listed during the period 2011-2015. Panel regression model was used to test the study hypotheses and achieve the study aims.

Findings

EM is negatively correlated with board size, confirming that a larger board is associated with a lower level of EM practices. Further, board independence is positively correlated with EM, suggesting that the larger the number of independent directors, the higher the level of EM practices. In addition, internal ownership is positively related to EM, confirming that the higher level of internal ownership increases EM practices. CEO duality does not appear to have any effect on EM in Bahrain Bourse. More interestingly, the findings reveal that companies practice EM through income-increasing DA.

Research limitations/implications

Financial data and data related to other corporate governance characteristics are lacking.

Practical implications

The results of this study provide empirical support for the development of new regulations and amendments and necessary corrective decisions regarding the effectiveness of applying corporate governance code in Bahrain Bourse. More specifically, this study reveals an urgent need for new amendments to restrict EM practices in Bahrain Bourse.

Originality/value

This study enriches the EM literature by covering Bahrain as an Asian country, which has not been sufficiently examined in relation to this topic. Further, this study provides a clear picture of the level of EM practices in Bahrain Bourse to multiple parties.

Citation

Alareeni, B. (2018), "Does corporate governance influence earnings management in listed companies in Bahrain Bourse?", Journal of Asia Business Studies, Vol. 12 No. 4, pp. 551-570. https://doi.org/10.1108/JABS-06-2017-0082