The Association between Corporate Governance and Earnings Management
Abstract
The dissertation provides an examination of the association between governance characteristics and earnings management for a sample of 98 companies that are listed on the FTSE 100 index between 2008 and 2018. The proxy of earnings management was based on the Modified Jones model using the absolute value of discretionary accruals. Using panel regression analysis and the fixed effect model to examine the earnings management on a set of key corporate governance variables, the key findings are that the percentage of independent directors in the Board is statistically significant in explaining earnings management. The higher the proportion of independent directors the smaller the absolute value of discretionary accruals reported, indicating that firms with larger independent directors are less likely to manipulate earnings.
The results also show that the smaller the Board size, the lower the discretionary accruals. Firms with a Board size of less than 6 are more likely to report lower absolute value of discretionary accruals. Small Board size implies that the probability of earnings manipulation decreases. The findings on CEO Duality show that when the CEO and the Chairman of the Board are the same, earnings management or manipulation decreases, which is contrary to what is expected. The results on the proportion of institutional holding show a negative association with earnings management and this indicates that institutional shareholders can reduce earning manipulation for firms in the FTSE 100 index. Thus, this research recommends that companies in the UK should attempt to have a high proportion of institutional shareholders because of the additional monitoring they have over those in order to run the firm.
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