Accounting Quality and Corporate Governance

Abstract

This study reviews the relationship of aspects of earnings quality and discusses the investigates whether a firm's corporate governance practices would have an effect on the quality of its published earnings. In particular, it discusses the relationship between corporate governance mechanisms (internal mechanisms, external mechanisms, and also mechanisms introduced by stakeholders other than shareholders and managers) and earnings quality. Earnings quality is viewed and tested in two aspects, namely earnings reliability and earnings relevance. After examining non-financial firms in fortune 500 in year 2002 and year 2004, it is found that corporate governance mechanisms (both internal and external mechanisms) have effects on curbing earnings management, and the results imply that better governance are related to higher earnings reliability. It is also found that corporate governance is positively related to earnings relevance, in the sense that external mechanisms (including those introduced by stakeholders other than shareholders and managers) have positive effect on earnings persistence, which indicates that investors think earnings numbers of better governed firms are more useful to their decision-making. However, there's no significant relationship found between corporate governance and earnings predictability.