Earnings Quality and Corporate Governance Following the Implementation of Malaysian Code of Corporate Governance

Abstract

This paper investigates the association between corporate governance mechanisms and earnings quality after the implementation of Anglo-Saxon based corporate governance code in Malaysia. Using 1625 firm-years observations during the period 2003-2007, we test whether corporate governance variables are significant in determining earnings quality. We regress eleven corporate governance mechanisms on earnings quality proxies, which are estimated using modified Jones (1991) and Kasznik (1999) model. We find that firms with (1) larger size of board of directors and (2) larger size of audit committee are significantly associated with higher level of earnings quality. This implies that board of directors and audit committees that are larger in size are more effective in performing their governing roles compared to smaller boards and audit committees. However, we also found that while the monitoring effectiveness of audit committee is consistent throughout the sample, the effectiveness of boards governance is only prevalent in government-linked and state-owned companies. As this study is conducted on a large set of sample over a reasonably adequate time-frame, the results capture a better picture of the association between earnings quality and corporate governance in Malaysia.