CORPORATE GOVERNANCE MECHANISMS AND EARNINGS MANAGEMENT IN INDIA: A STUDY OF BSE-LISTED COMPANIES
Journal Title: Delhi Business Review: An International Journal of SHTR - Year 2017, Vol 18, Issue 1
Abstract
Purpose: The present study contributes to the literature by investigating the impact of corporate governance practices on earnings management by companies. Design/Methodology/Approach: To achieve the objectives of this study, a sample of 36 largecapitalisation companies listed on BSE (Bombay Stock Exchange) for the period 2005-06 to 2014-15 has been analysed. This is the period which started just after SEBI introduced revised Clause 49 of the Listing Agreement. Annual reports of companies have been analysed for the purpose of this study. Corporate governance has been quantified through its different attributes, i.e., size of board of directors (board size), board and audit committee meeting frequency, board independence, role duality (CEO/ chairman), and audit committee independence. These factors are considered to play an important role in constraining the propensity of managers to engage in earnings management. Earnings management is measured by discretionary accruals calculated using the modified Jones model developed by Dechow et al. (1995). Findings: The empirical findings are quite in line with the philosophy of corporate governance. Board independence and earnings management are negatively correlated. Similarly, board size and audit committee independence are positively associated with earnings management. However, three of the corporate governance variables (i.e., board meeting frequency, audit committee meeting frequency, and role duality) are found insignificantly related to earnings management. Research Limitations: This is a preliminary analysis investigating the impact of corporate governance practices on earning management of select companies in India. Limitations of the study includes: (i) More elaborate testing of time series properties is not done; (ii) More econometric techniques can be used; (iii) We have accounted only for ROA as the control variable whereas there are many other factors that may influence earnings management decisions of managers, namely, leverage, and firm growth; and (iv) Results can further be improved by increasing the sample size of the study. Practical Implications: In general, the paper empirically demonstrates the relationship between corporate governance and earnings management, i.e., corporate governance is negatively associated with earnings management. The findings of this study have important policy implications as they encourage adopting corporate governance practices in firms in order to mitigate earnings management. This will help to reduce distortions in financial reporting and therefore, enhance the reliability and transparency of reported financial statements. Originality/Value: Our study is unique in the sense that very few studies have been done on the aspect of investigating the impact of corporate governance practices on earning management in India. Key Words: Corporate Governance, Discretionary Accruals, Earnings Management.
Authors and Affiliations
Amit Kumar Singh, Annu Aggarwal, Ashween Kaur Anand
Keywords
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