Corporate governance and earnings management in Malaysian government linked companies

Abstract

PurposeAs the major shareholder, in 2004, the Malaysian Government embarked on the transformation initiative of the Government Linked Companies (GLCs). One of the main initiatives was to enhance board effectiveness through its Green Book. Soon after, the progress performance review revealed that the GLCs reported improved earnings. Such drastic performance turnarounds triggered the question as to whether earnings quality is at stake. The purpose of this paper is to examine the impact of the tightening of corporate governance mechanisms on earnings management (EM) activities of the GLCs.Design/methodology/approachThe earnings data for two periods (pre‐ and post‐transformation) were collected and tested to determine whether the GLCs experienced any improvement of board monitoring role in curbing EM activities in the post‐transformation period.FindingsThe main findings show that there is an increase of EM activities in the post‐transformation policy. Furthermore, the study also reveals that none of the corporate governance mechanisms has much impact on curbing activities, except for board meetings and leadership structure in the post‐transformation period. The board meetings and separation of chairman and chief executive officers in the companies were shown to only have a negative impact on EM activities in the post‐transformation period. Although the study has shown a positive preliminary impact from tightening the corporate governance of the GLCs, weak earnings quality might undermine the efforts to sustain such a transformation.Originality/valueThe paper contributes to the limited body of literature concerning the impact of corporate governance on earnings management by examining such impact using Government Linked Companies in Malaysia after introducing the transformation programme.