Effects of corporate governance on earnings management. (c2016)

Abstract

Effects of corporate governance practices on various financial, managerial, and operational activities within organizations have been extensively studied in the previous two decades. Earnings management, viewed as legal and appropriate means by some researchers and illegal by others, is one of the financial activities that could be impacted by the corporate governance practices of the organization. Higher level of implementation of the corporate governance components (transparency of financial data, board of directors, ownership structure, corporate social responsibility and audit committee) is thought to reduce unfavorable earnings management. Several recent studies have concluded that Lebanese corporations do not give corporate governance much importance. Moreover, earnings management has not been tested thoroughly within the Lebanese context. This study focuses on determining the impact of good corporate governance practices on reducing unfavorable earnings management activities. In particular, the study aims at identifying the corporate governance components to reducing unfavorable earnings management by Lebanese organizations. Data were collected from questionnaires which were distributed to employees working at various Lebanese companies and having a certain level of familiarity with their company’s financial reporting. Results show that companies with higher degree of independence of the board of directors, effective audit committee, transparency in terms of financial reporting, and good corporate social responsibility practices tend to have less unfavorable earnings management.