The Effect Of Corporate Internal Governance On Earnings Management

Based on the agency theory,this paper investigates the effect of corporate internal governance on earnings management.Using a sample of 1176 listed firms of Shanghai and Shenzhen Stock Exchanges from 2006 to 2007,we develop three multiple regression models to examine how board of directors,board of supervisors and ownership structure affect earnings management.The results show that the CFO modified cross-sectional Jones model is better than the original cross-sectional Jones model because the CFO modified cross-sectional Jones model can substantially improve the measurement accuracy;corporate internal governance does have an effect on earnings management and corporate internal governance structure variables can explain the issue of earnings management.Earnings management is negatively correlated with the size of the board of directors,positively correlated with the board of directors meetings and the number of directors who don't receive remunerationthe;earnings management is positively correlated with the board of supervisors meetings and the number of supervisors who don't receive remunerationthe;earnings management is U-shaped correlated with the shares held by controlling shareholders,positively correlated with the nature of controlling shareholder and negatively correlated with issuing B shares or H shares. Therefore,expanding the size of the board of directors and improving the pay system can be helpful to reduce earnings management and improve the quality of financial information.On one hand,concentrate ownership can promote corporate internal governance to reduce earnings management;on the other hand,blockholder ownership above a certain level may lead to entrenchment of owner-managers that expropriate the wealth of minority shareholders by tunneling so as to exacerbate earnings management. This paper holds that to strengthen corporate internal governance is the key to solve the issue of earnings management.