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Title: Board of directors, audit committee, managerial ownership and earnings management : Malaysian evidence
Author: Haron, Norhayati
Awarding Body: Bangor University
Current Institution: Bangor University
Date of Award: 2012
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The current study investigates the link between internal corporate governance mechanisms and earnings management in Malaysia, ajurisdiction which is characterised by relatively concentrated ownership, weak enforcement, and poor investor protection. Here, the corporate governance attributes considered are board characteristics, audit committee characteristics, and managerial ownership. In the main analysis, we use four variants of a cross-sectional modified Jones (1991) model as proxies for the degree of earnings management. Since it has been suggested that there is potential for modified Jones models to misclassify discretionary and non-discretionary accruals, we also employ Dechow and Dichev (2002) and a modified version .Q(Dechow and Dichev (McNichols, 2002) accrual estimation errors models as alternative proxies for earnings management. Based on listed firms domiciled in Malaysia for the financial periods ending 2000 to 2004 inclusive, the key findings are as follows: First, in the main analysis using a modified Jones model, board size is not significant in influencing the degree of discretionary accruals. On the contrary, in the additional analysis using an accruals estimation errors model (i.e. modified Dechow and Dichev, 2002), our results indicate positive relation between board size and earnings management. With respect to the proportion of directors who are independent, our results show that this governance variable is positively associated with discretionary accruals, which is contradictory to our hypothesis and most prior findings. Second, after controlling for a firm's specific attributes, sector and year variations, the results show that the audit committee is not significant in influencing discretionary accruals. Similarly, independent directors as a proportion of audit committee membership are found to be not significant in determining discretionary accruals. In the supplementary analysis, the results indicate audit committee independence is positively related to discretionary accruals. Third, with respect to managerial ownership, our findings show that this governance variable is negatively associated with the propensity of discretionary accruals. The result is also similar using the accrual estimation errors model as an alternative proxy of earnings management. Fourth, using the discretionary accruals as a proxy of earnings management, the regression result of role duality variable indicates positive, and is weakly significant. Finally, based on results demonstrated using discretionary accruals, there is an implication that a Big 4 auditor is associated with higher magnitude of discretionary accruals. However, in the additional analysis accruals estimation error as a proxy for earnings management, our findings indicate that a Big 4 auditor is negatively and significantly associated with discretionary accruals. Although the result in the additional analysis (i.e., accruals estimation error) contradicts the main results (discretionary accruals), this can be explained by the fact that these proxies measure different dimensions of earnings management. Hence, these differences should be taken into consideration when interpreting the current empirical results. Overall, although our results contradict the findings of prior studies using the UK and the US datasets, the results are consistent with recent studies using a dataset from jurisdictions with similar characteristics to Malaysia. Our results lend support to our argument and prior researchers' contention that corporate governance reforms in a given country must go beyond adopting the best practice in the UK and the US, and take into account its institutional and firm-specific characteristics.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available