Impact of corporate governance on earnings management in India

Abstract

The study examines the relationship between the Earnings Management and the quality of Corporate Governance. Quality of the corporate governance is measured in terms of composition and functioning of the audit committee and board of directors while the earnings management is measured in terms of the discretionary accruals as calculated from the Modified Cross Sectional Jones Model. A set of 50 companies out of the BSE 200 companies were selected and investigated for finding the relationship between the Earnings Management and the quality of Corporate Governance. The scores of various parameters representing the quality of corporate governance were identified and regressed with discretionary accruals, a proxy for earnings management. The result indicated that presence of an independent audit committee that meets regularly, board of director consisting of independent non-executive members having large number of directorship in other firms, and presence of Big 4 auditors control the practice of earnings management and improve the quality of financial information provided by the firm. Whereas factors such as high promoter stake in the company increased the probability of earnings management.