Online from: 2005
Subject Area: Accounting and Finance
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|Title:||An investigation of the association between corporate governance, earnings management and the effect of governance reforms|
|Author(s):||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)|
|Citation:||Marion R. Hutchinson, Majella Percy, Leyal Erkurtoglu, (2008) "An investigation of the association between corporate governance, earnings management and the effect of governance reforms", Accounting Research Journal, Vol. 21 Iss: 3, pp.239 - 262|
|Keywords:||Corporate governance, Earnings, Share ownership schemes|
|Article type:||Research paper|
|DOI:||10.1108/10309610810922495 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
|Acknowledgements:||The authors would like to thank the editor and an anonymous reviewer for their helpful comments. The comments of the participants of the Pacific Basin Finance Accounting and Management Conference, Brisbane 2008 are also gratefully acknowledged.|
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.
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