Abstract
This study examines the relationship between earnings management and characteristics of corporate governance mechanism for a sample of Jordanian non-financial firms during the period 2006-2009. Earnings management is measured by discretionary accruals using Jones models. The characteristics examined are the existence of independence members within the board of directors, the size of the board of directors, the role duality (CEO/chairman), the percentage of insider ownership. In addition, two controlled variables have been employed in this study: size of the company and financial leverage. The results of this study reveal that the size of board of directors is the only variable that has a significant relation with earnings management. The findings of this study have important policy implications since they support encouraging applying corporate governance principles in order to control the behaviors of the board of directors which may lead to distortion in reported financial annual reports. As a result, the reliability and transparency of reported financial statements may be enhanced.
Highlights
The primary objective of financial statements is to provide users with information relating to the uncertainty and timing of future cash flows
The results of this study reveal that the size of board of directors is the only variable that has a significant relation with earnings management
This study aims to acquire knowledge of whether the existence of corporate governance mechanisms are effective in extenuating earnings management activities among companies listed on the Amman Stock Exchange (ASE)
Summary
The primary objective of financial statements is to provide users with information relating to the uncertainty and timing of future cash flows. The first is the capital market pressure which states that the widespread use of accounting information by investors and financial analysts for stock valuation creates incentives for executives to manage earnings in order to influence short-term stock performance. The bankrupt of large companies has raised serious questions about the effectiveness of different monitoring devices such as external examiner, voluntary disclosure and corporate governance mechanism (Ebrahim, 2007). Based on agency theory framework, outside directors have an incentive to avoid colluding with managers because the value of independent directors’ human capital is partially determined by the effectiveness of their monitoring performance (Fama and Jensen, 1983). This study aims to acquire knowledge of whether the existence of corporate governance mechanisms are effective in extenuating earnings management activities among companies listed on the Amman Stock Exchange (ASE). Contributions to the literature, limitations, and suggestions for future researches are presented
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