Abstract
PurposeThe purpose of this paper is to determine whether the representation of women on the boards (WOMBDs) and audit committees is associated with a reduction in the practice of earnings management and whether women are associated with income reducing (conservative) rather than income-increasing (aggressive) earnings management. The authors further argue that family ownership moderates the relationship between the presence of WOMBDs and audit committees and earnings management.Design/methodology/approachThe study uses non-finance firms listed on Bursa Malaysia over a period of four years, i.e. from 2008 until 2011.FindingsThe evidence reveals that the presence of WOMBD or audit committee is not associated with a propensity for earnings management. In addition, the evidence also reveals that family ownership does not interact either with WOMBD or with women on the audit committee (WOMAC) to influence the propensity for earnings management. Nevertheless, the additional analyses show that, while women on boards are not associated with income-decreasing accruals, the presence of women on audit committees leads to income-reducing earnings management. The evidence further reveals that family ownership does not interact with either WOMBD or WOMAC to influence income-decreasing earnings management.Originality/valueThis study extends prior research on the role of women directors and women audit committee members on earnings management focussing on family ownership. Further, the study also examines the direction of earnings management as opposed to the most prior studies, which mainly focus on the propensity of earnings management.
Highlights
The issue of earnings quality and earnings management has been the subject of intense research following instances of corporate financial failure and fraud by large firms such as Enron in 2001 and WorldCom in 2002 in the USA and Pharmalat in 2003 in Italy
After excluding companies with insufficient data, those designated under PN17, those in the finance, real estate investment trust (REIT) and closedfund categories and those belonging to sectors that consist of less than six companies, a total of 2,412 firm-years (603 companies) were included in the final sample
The mean value of absolute Discretionary accruals (DACC) found in our study is slightly lower than the mean value of absolute DACC found in other studies in Malaysia (e.g. Abdul Rahman and Mohamed Ali, 2006; Abdul Jalil and Abdul Rahman, 2010)
Summary
The issue of earnings quality and earnings management has been the subject of intense research following instances of corporate financial failure and fraud by large firms such as Enron in 2001 and WorldCom in 2002 in the USA and Pharmalat in 2003 in Italy. Malaysia is no exception as it has had its own scandals involving listed companies such as Transmile and Megan Media, whose accounting irregularities were discovered in 2007. Earnings management, while it is legal, is considered unethical because it affects the credibility of companies and the capital market. Women’s ethical values, leadership styles, and higher level of risk aversion mitigate the practice of earnings management in a firm (Daily and Dalton, 2003; Eckel and Grossman, 2008; Fehr-Duda, 2006; Krishnan and Parsons, 2008; Stephenson, 2004; Watson and McNaughton, 2007). A study of this issue in the context of Malaysian companies is of benefit not least because the cultural and business environment is different from that of the US or the UK, where most of the studies on this topic have been based
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