UPSI Digital Repository (UDRep)
Start | FAQ | About
Menu Icon

QR Code Link :

Type :article
Subject :Q Science (General)
ISSN :0167-4544
Main Author :Nooraisah Katmon
Additional Authors : Al Farooque, Omar
Title :Exploring the impact of internal corporate governance on the relation between disclosure quality and earnings management in the UK listed companies
Year of Publication :2017

Abstract :
This study investigates the impact of internal corporate governance on the relation between disclosure quality and earnings management in the UK listed companies, in particular whether governance mechanisms have deterrent effect on earnings management similar to firms’ disclosure quality. Unlike prior literature, we measure a number of board and audit committee-related governance instruments, three disclosure quality proxies (i.e. Investor Relation Magazine Award, Forward-Looking Disclosure and Analyst Forecast Accuracy) and the Modified Jones Model to test the hypotheses of the study on a matched-pair sample data of Investor Relation Magazine Award winning and non-winning firms. Our findings in the OLS and sensitivity analyses using Heckman Procedure and 2SLS regressions consistently report a significant negative association between earnings management and disclosure quality for all proxies in restraining earnings management. In contrast, corporate governance variables are mostly insignificantly related to earnings management. This provides an emerging trend of the outperformance of disclosure quality over internal governance mechanisms in lessening earnings management. These findings warrant due attention of the policy makers, investors, corporate firms and other stakeholders in shaping a high-quality disclosure and governance regime in corporate settings to mitigate managerial manipulations of earnings across the countries in the world.

References

1. Abarbanell, J., & Lehavy, R. (2003). Biased forecasts or biased earnings? The role of earnings management in explaining apparent optimism and inefficiency in analysts’ earnings forecasts. Journal of Accounting and Economics, 36, 105–146. 2. Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit committee characteristics and Restatements. Auditing: A Journal of Practice and Theory, 23(1), 69–87. Adam, R., & Ferreira, D. (2007). A theory of friendly boards. Journal of Finance, 62, 217–250. 3. Adkins, L. C., & Hill, R. C. (2008). Using Stata for Principles of Econometrics (3rd ed.). New York: John Wiley & Sons Inc. 4. Akerlof, G. A. (1970). The market for ‘‘lemons’’: Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 89, 488–500. 5. Allen, F., & Faulhaber, G. R. (1989). Signalling by underpricing in the IPO market. Journal of Financial Economics, 23(2), 303–323. 6. Alonso, P., Palenzuela, V., & Iturriaga, F. (2000). Managers discretionary behavior, earnings management and corporate governance: An empirical international analysis. Working Paper,Universidad de Valladolid. 7. A´ lvarez, I. G., Sa´nchez, I. M. G., & Domı´nguez, L. R. (2008).Voluntary and compulsory information disclosed online: The effect of industry concentration and other explanatory factors. Online Information Review, 32(5), 596–622. 8. Arcot, S., & Bruno, V. G. (2006). In letter but not in spirit: An analysis of corporate governance in the UK. Retrieved from SSRN: http://ssrn.com/abstract=819784. 9. Arcot, S., & Bruno, V. (2011). Silence is not golden: Corporate governance standards, transparency and performance. Working Paper, London: Financial Markets Group. 10. Arcot, S., Bruno, V., & Faure-Grimaud, A. (2010). Corporate governance in the UK: Is the comply or explain approach working? International Review of Law and Economics, 30(2),193–201. 11. Armstrong, C. S., Guay, W. R., & Weber, J. P. (2010). The role of information and financial reporting in corporate governance and debt contracting. Journal of Accounting and Economics, 50(2–3), 179–234. 12. Athanasakou, V. E., Strong, N. C., & Walker, M. (2009). Earnings management or forecast guidance to meet analyst expectations? Accounting and Business Research, 39(1), 3–35. 13. Balsam, S., Bartov, E., & Marquardt, C. (2002). Accrual management, investor sophistication and equity valuation: Evidence from 10-Q Filings. Journal of Accounting Research, 40(4), 987–1012. 14. Barker, R. G. (1998). The market for information- evidence from finance directors, analysts and fund managers. Accounting and Business Research, 29(1), 3–20. 15. Barth, M., Cram, D., & Nelson, K. (2001). Accruals and the prediction of future cash Flows. The Accounting Review, 76,27–59. 16. Bartov, E., & Monaharam, P. (2004). Private information, earnings manipulations and executive stock-option exercises. The Accounting Review, 79(4), 889–920. 17. Baxter, P., & Cotter, J. (2009). Audit committees and earnings quality. Accounting and Finance, 49(2), 267–290. 18. Beasley, M. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, 71(4), 443–465. 19. Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Lapides, P. D.(2000). Fraudulent financial reporting: Consideration of industry traits and corporate governance mechanisms. Accounting Horizons, 14, 441–454. 20. Beaver, W. (1998). Financial reporting: An accounting revolution (3rd ed.). Upper Saddle River, NJ: Prentice Hall. 21. Becker, C., DeFond, M., Jiambalvo, J., & Subramanyam, K. R.(1998). The effects of audit quality on earnings management. Contemporary Accounting Research,15(1), 1–24. 22. Be´dard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing: A Journal of Practice and Theory, 23(2), 13–35. 23. Benkel, M., Mather, P., & Ramsay, A. (2006). The assassination between corporate governance and earnings management: The role of independent. Corporate Ownership and Control, 3,65–75. 24. Bhat, G., Hope, O.-K., & Kang, T. (2006). Does corporate governance transparency affect the accuracy of analyst forecasts? Accounting and Finance, 46(5), 715–732. 25. Bhattacharya, U., Daouk, H., & Welker, M. (2003). The world price of earnings opacity. The Accounting Review, 78(3), 641–678. 26. Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (1999). Report and Recommendations of Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. New York and Washington, DC, NYSE and NASD. 27. Boesso, G., & Kumar, K. (2007). Drivers of corporate voluntary disclosure, a framework and empirical evidence from Italy and United State. Accounting, Auditing and Accountability Journal, 20(2), 269–296. 28. Braiotta, L. (2000). The audit committee handbook (2nd ed.). NY: John Wiley & Sons. 29. Brennan, N. (2006). Boards of directors and firm performance: Is there an expectations gap? Corporate Governance: An International Review, 14, 577–594. 30. Brown, P., Beekes, W., & Verhoeven, P. (2011). Corporate governance, accounting and finance: A review. Accounting and Finance, 51, 96–172. 31. Byard, D., Li, Y., & Weintrop, J. (2006). Corporate governance and the quality of financial analysts’ information. Journal of Accounting and Public Policy, 25, 609–625. 32. Cadbury, Sir A. (1992). Committee on the financial aspects of corporate governance. London: Gee Publishing. 33. Carcello, J. V., & Neal, T. L. (2003). Audit committee characteristics and auditor dismissals following ‘‘new’’ going-concern reports. The Accounting Review, 78, 95–117. 34. Chang, J. C., & Sun, H. L. (2009). Crossed-listed foreign firms’ earnings informativeness, earnings management and disclosures of corporate governance information under SOX. The International Journal of Accounting, 44, 1–32. 35. Chen, H., Chen, J. Z., Lobo, G., & Wang, Y. (2011). Effects of audit quality on earnings management and cost of equity capital: Evidence from China. Contemporary Accounting Research, 28(3), 892–925. 36. Iatridis, G., & Kadorinis, G. (2009). Earnings management and firms financial motives: A financial investigation of UK listed firms.International review of Financial Analyses, 18, 164–173. 37. Ingley, C. B., & Van der Walt, N. T. (2004). Corporate governance, institutional investors and conflicts of interest. Corporate Governance: An International Review, 12, 354–511. 38. Irfan, S. (2011). Modelling wages of females in the UK. International Journal of Business and Social Science, 2(11), 195–202. 39. Jaggi, B., Leung, S., & Gul, F. (2009). Family control, board independence and earnings management: Evidence based on Hong Kong firms. Journal of Accounting and Public Policy, 28,281–300. 40. Jensen, M. (1993). The modern industrial revolution, exit and the failure of internal control systems. Journal of Finance, 48(3), 831–880. 41. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360. 42. Jensen, M., & Smith, C. (1985). Stockholder, manager and creditor interests: Applications of agency theory. In I. A. Edward, M.G. Subrahmanyam, & R. D. Irwin (Eds.), Recent advances in corporate finance (pp. 93–131). R.D. Irwin: Homewood. 43. Jiang, W., Lee, P., & Anandarajan, A. (2008). The association between corporate governance and earnings quality: Further evidence using the GOV-Score. Advances in Accounting, Incorporating Advances in International Accounting, 24, 191–201. 44. Jo, K., & Kim, Y. (2007). Disclosure frequency and earnings management. Journal of Financial Economics, 84, 561–590. 45. John, K., & Senbet, L. (1998). Corporate governance and board effectiveness. Journal of Banking & Finance, 22, 371–403. 46. Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29, 193–228. 47. Kang, S., & Kim, Y. (2011). Does earnings management amplify the association between corporate governance and firm performance? International Business and Economics Research Journal, 10(2), 53–66. 48. Kao, L., & Chen, A. (2004). The effects of board characteristics on earnings management. Corporate Ownership and Control, 1(3), 96–107. 49. Kao, J. L., Wu, D., & Yang, Z. (2009). Regulations, earnings management, and post-IPO performance: The Chinese evidence. Journal of Banking & Finance, 33,63–76. 50. Kasznik, R. (1999). On the association between voluntary disclosure and earnings management. Journal of Accounting Research, 37(1), 57–81. 51. Ke, B. (2001). Why do CEOs of publicly traded firms prefer reporting small increases in earnings and long strings of consecutive earnings increases? Working Paper, The Pennsylvania State University. 52. Kent, P., Routledge, J., & Stewart, J. (2010). Innate and discretionary accruals quality and corporate governance. Accounting and Finance, 50, 171–195. 53. Kiel, G., & Nicholson, G. (2003). Board composition and corporate performance: How the Australian experience informs contrasting theories of corporate governance. Corporate Governance, 11(3),189–205. 54. Klein, A. (2002a). Audit committee, board of director characteristics,and earnings management. Journal of Accounting and Economics, 33, 375–400. 55. Klein, A. (2002b). Economic determinants of audit committee independence. Accounting Review, 77(2), 435–453. 56. Laksmana, I. (2008). Corporate board governance and voluntary disclosure of executive compensation practices. Contemporary Accounting Research, 25(4), 1147–1182.


This material may be protected under Copyright Act which governs the making of photocopies or reproductions of copyrighted materials.
You may use the digitized material for private study, scholarship, or research.

Back to previous page

Installed and configured by Bahagian Automasi, Perpustakaan Tuanku Bainun, Universiti Pendidikan Sultan Idris
If you have enquiries, kindly contact us at pustakasys@upsi.edu.my or 016-3630263. Office hours only.