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Investment in outside governance monitoring and real earnings management: evidence from an emerging market

Investment in outside governance monitoring and real earnings management: evidence from an... The main aim of this study is to examine the effect of investment in outside governance monitoring (IOGM), through non-executive directors' remuneration (NEDR) and external audit fees (AFEE), on real earnings management (REM) in an emerging market in the Southeast Asia region, Malaysia.Design/methodology/approachThe data comprises 1,056 observations from manufacturing companies listed on Bursa Malaysia for the four-year period, 2013 to 2016. The study tests IOGM individually and aggregately with REM. Feasible generalized least squares (FGLS) regression is used to test the hypotheses.FindingsThe results show that NEDR is negatively and significantly associated with REM. Likewise, AFEE is significantly associated with lower REM. Aggregate IOGM significantly mitigates REM. Additional tests conducted show consistent findings.Research limitations/implicationsThis evidence supports agency theory and signaling theory, that a high level of investment in governance monitoring signals a high demand for monitoring and fewer agency problems. It justifies more investment in outside scrutiny and monitoring to limit the existence of managers' opportunistic behavior in concentrated markets. This study relies on an aggregate measure of REM and focuses on manufacturing companies in Malaysia; thus, the results may not be the same using other measurements and samples.Originality/valueThe study, to the best of the researchers' knowledge, is the first to document evidence in an emerging market suggesting that higher NEDR and AFEE are individually and aggregately associated with lower REM. Policymakers, shareholders and researchers may consider investment in these two mechanisms as a proxy of high-quality monitoring that mitigates REM. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting in Emerging Economies Emerald Publishing

Investment in outside governance monitoring and real earnings management: evidence from an emerging market

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2042-1168
DOI
10.1108/jaee-08-2020-0203
Publisher site
See Article on Publisher Site

Abstract

The main aim of this study is to examine the effect of investment in outside governance monitoring (IOGM), through non-executive directors' remuneration (NEDR) and external audit fees (AFEE), on real earnings management (REM) in an emerging market in the Southeast Asia region, Malaysia.Design/methodology/approachThe data comprises 1,056 observations from manufacturing companies listed on Bursa Malaysia for the four-year period, 2013 to 2016. The study tests IOGM individually and aggregately with REM. Feasible generalized least squares (FGLS) regression is used to test the hypotheses.FindingsThe results show that NEDR is negatively and significantly associated with REM. Likewise, AFEE is significantly associated with lower REM. Aggregate IOGM significantly mitigates REM. Additional tests conducted show consistent findings.Research limitations/implicationsThis evidence supports agency theory and signaling theory, that a high level of investment in governance monitoring signals a high demand for monitoring and fewer agency problems. It justifies more investment in outside scrutiny and monitoring to limit the existence of managers' opportunistic behavior in concentrated markets. This study relies on an aggregate measure of REM and focuses on manufacturing companies in Malaysia; thus, the results may not be the same using other measurements and samples.Originality/valueThe study, to the best of the researchers' knowledge, is the first to document evidence in an emerging market suggesting that higher NEDR and AFEE are individually and aggregately associated with lower REM. Policymakers, shareholders and researchers may consider investment in these two mechanisms as a proxy of high-quality monitoring that mitigates REM.

Journal

Journal of Accounting in Emerging EconomiesEmerald Publishing

Published: Jan 11, 2022

Keywords: Non-executive directors remuneration; Audit fees; Audit quality; Governance monitoring; Corporate governance; Real earnings management

References