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

Marion R. Hutchinson, Majella Percy and Leyal Erkurtoglu

Accounting Research Journal, 2008, vol. 21, issue 3, pages 239-262

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: Corporate governance; Earnings; Share ownership schemes (search for similar items in EconPapers)
Date: 2008

Downloads: (external link)
http://www.emeraldinsight.com/Insight/viewContentI ... le&contentId=1752758
Cannot be freely downloaded

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eme:arjpps:v:21:y:2008:i:3:p:239-262

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://www.emeraldinsight.com/arj.htm

Access Statistics for this article

Accounting Research Journal is edited by Christine Ryan

More articles in Accounting Research Journal from Emerald Group Publishing
Series data maintained by Rebecca Forster ().