Abstract
In this paper, we investigate whether the characteristics of boards of directors are associated with earnings management. By employing a sample of listed firms in the Athens Stock Exchange during the period from 2008 to 2016 and applying two different earnings management models (Dechow’s ’96 and DeAngelo’s ’86) to explore, via the discretionary accruals, for the presence of earnings management, we surprisingly found no evidence of almost any effect of the investigated board characteristics, except CEO duality. Besides, we also found significant variation over time. This finding confirms the unpresented effect of the sovereign debt crisis on Greek firms. The corporate governance legal framework has been improved since the mandatory adoption of the International Accounting Standards, at least from the listed firms in the Athens Stock Exchange in 2005. Under the new rules, more detailed corporate governance information is included in the firms’ financial reports during the last decade.
Highlights
Earnings management (EM hereafter) can influence shareholders who use financial information to make decisions and can affect the credibility of financial information, which could lead to major financial scandals and potential capital market collapse
The findings showed that EM is negatively related to board size, board independence is positively related to EM, CEO duality does not have any effect on EM in Bahrain
Contrary to what is expected, the analysis in this paper suggests that EM through the use of discretionary accruals, the accruals that do not result from the normal course of business activity and are known as abnormal accruals, does not respond to management incentives
Summary
Earnings management (EM hereafter) can influence shareholders who use financial information to make decisions and can affect the credibility of financial information, which could lead to major financial scandals and potential capital market collapse. Due to the low compliance of firms with the voluntary code (Spanos 2005), the Greek Government issued a fully harmonised Law (3016/2002) with the European Union directives for the mandatory adoption of CG rules (Florou & Galarniotis, 2007) According to this law, a higher proportion of non-executive independent board members is required in order to protect the stakeholders’ interest and improve their confidence in the firms’ management and reported information. Bekiris and Doukakis (2011) examined the association between corporate governance and accruals EM using a CG index based on a sample of firms listed on the Athens, Milan, and Madrid stock exchanges and found an inverse relationship between CG and EM Their findings suggest that firms that apply high levels of corporate governance standards are less likely to manage their earnings, resulting in higher earnings quality. The discussion of our findings comes and the final section includes the conclusion and future research suggestions
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