Earnings management, corporate governance and corporate performance among Malaysian listed companies

Abstract

The lack of transparency in financial reports has several reasons, but the most important is earnings management practices which are implemented by managers. Indeed, managers, by using EM (Earnings Management) tools, manipulate accounting information to achieve some goals. This goes against Corporate governance, whose primary goal is to deal with identifying potential mechanisms in which the shareholders of a corporation have more power and exercise control over the managers to protect their interests. Nevertheless, most researches have been concentrating on the relationship between corporate governance and firm performance, but only a few studies have regarded the moderator function of corporate governance on firm performance from different aspects. This study investigates whether corporate governance affects the relationship between earnings management and corporate performance by using data of listed companies in Bursa Malaysia. This study uses panel data analysis and uses the data from FTSE Russell by applying the intersection function to the constituents of FTSE Top 100 Bursa Malaysia during 2011 to 2015, which includes 59 companies in the form of 295 companies/year as time series data set. The results show that discretionary accruals (DAs) has significant effects on ROA, ROE, Tobin’s Q and EVA of firms in a weak governance regime. This study implies that managers in weakly governed firms are more likely to abuse accounting discretion than those in strongly governed firms, leading to decrease firm performance. Managers prefer using DAs to window-dress financial earnings, but this causes a more significant reversal of corporate value in the subsequent period. Conversely, DAs are positively and significantly related to firm performance in an influential governance regime.