Longitudinal approach to the study of corporate governance code and earnings management relationship: the case of Saudi Arabia

Abstract

PurposeThis paper investigates whether the introduction of the 2006 corporate governance code and subsequent amendments constrain corporate earnings management (EM) practices amongst listed companies in Saudi Arabia.Design/methodology/approachAccounting and corporate governance (CG) data were collected from annual financial reports of a sample of 108 listed companies from 2007 to 2019. Absolute value of discretionary accruals was regressed against tested CG determinants provided in the CG code. The authors also employed other econometric models to check potential endogeneities.FindingsThe overall results provide evidence that the 2006/2018 Saudi Arabia corporate governance code (SACGC) does not deter EM practices in public companies.Practical implicationsRegulators and other stakeholders should make a deliberate effort to improve the Saudi CG environment by focussing on governance aspects such as board and ownership structures to ensure the independence of the board to effectively perform its statutory roles, as EM practices persist in the system.Originality/valueThis paper extends the literature on the effectiveness of CG, by providing evidence that CG code does not effectively constrain EM activities in settings where CG structures may exist, but greater importance is attached to informal relationships and other considerations than formal CG mechanisms, as these features usually work against the potentials of the principles of good CG as in the case of Saudi Arabia.