An Investigation Of The Association Between Corporate Governance Characteristics And Accrual-based Earnings Management

Based on agency theory, questions associated with the separation between ownership and control will lead managers to perform in an opportunistic manner by increasing their personal wealth at the cost of the owners of an organization (Jensen and Meckling,1976). This opportunistic behavior provides the opportunity to managers to manipulate the financial information of firms in order to get their own benefit. Thus in order to protect the rights of the stakeholders, it is vital for an organization to have an effective corporate governance mechanism which can control the asymmetry of financial information. For this purpose, there has been an international movement towards developing and implementing an effective corporate governance mechanism to fight against the opportunistic behaviors of the managers in order to make the financial reporting, better.The purpose of this paper is to investigate the efficiency of corporate governance characteristics in reducing earnings management among the listed firms of Shanghai and Shenzhen stock exchange, China, a country with significantly different institutional and legal characteristics from the Anglo-Saxon countries. By assessing a broad range of laws, regulations and codes of the corporate governance system in china, it provides a valuable orientation for understanding that how much has been accomplished in Chinese corporate governance and the main goal of future reform efforts. China provides a particularly significant study for the monitoring role of corporate governance characteristics in restricting earnings management. Previous findings also confirm the occurrence and severity of earnings management in China (e.g., Aharony et al.2000; Chen and Yuan 2004). Chinese listed companies manipulate their earnings dramatically in order to issue new shares or to avoid being delisted.1 took abnormal working capital accruals as a proxy for earning management. In this paper, I used modified Jones Modej in order to calculate discretionary accruals (DAC). The sample comprises of 1009 firms over the period of 5 years from 2002 to 2006. The study essentially shows that the corporate governance characteristics play a vital role in reducing the earning management.I found a-significantly positive association between earning management and different corporate governance characteristics such as CEO duality, board meetings, females'directors and concentrated ownership. We lacked evidences to find relationship between board size, director's shareholdings and proportion of independent directors with DAC as well as between the presence of audit committee and DAC. These studies will broaden the scope of the relationship between earning management and corporate governance characteristics. Very few studies have been conducted in this area especially for the Chinese listed firms with empirical evidences given. A variety of corporate governance variables are used especially Board sex ratio, Proportion of independent non-executive directors, CEO duality, Board size, Audit committee, Frequency of board meetings, Ownership concentration, Director Shareholdings in this analysis.