[Earnings Management & Corporate Governance]

by

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

Signed __________________ Date _________________

Table of Contents

CHAPTER IV: RESULTS & FINDINGS2

Descriptive statistics2

Regression results9

Additional analyses15

Overall board results29

Audit committee regression results35

Executive committee38

Sensitivity analyses41

CHAPTER V: SUMMARY AND CONCLUSIONS43

REFERENCES46

CHAPTER IV: RESULTS & FINDINGS

This dissertation examines the effectiveness of the board of directors and the audit committee in limiting earnings management which is related to earnings benchmarks. Two earnings benchmarks are taken with the first one being zero and the second one being the previous year's earnings. The sample is split according to whether pre-managed earnings (i.e. actual earnings minus discretionary accruals) are above or below the benchmark target. When pre-determined earnings are less than targets then it is expected that discretionary accruals are income - increasing. Accordingly, when pre-determined earnings are more than targets the discretionary accruals will be income-decreasing. The relationship between the board, the audit committee and earnings management is then examined so as to evaluate whether income increasing or income decreasing discretionary accruals were the result of earnings management.

Descriptive statistics

Table 2 provides descriptive statistics for the full and GAAP samples in Panel A and Panel B respectively. The average absolute value of discretionary accruals is 0.074 (0.085) and the median of absolute discretionary accruals is 0.052 (0.064) for the full (GAAP) sample. The mean and median discretionary accruals are -0.001 (0.002) and -0.008 (-0.004) for the full (GAAP) sample respectively. On average, 15% (11%) of directors (supervisors) are independent for the full sample, whereas 53% (37%) of directors (supervisors) are independent for the GAAP sample, suggesting an increasing trend towards establishing independent directorships and/or supervisorships after the enactment of the GAAP. About 53% (56%) of independent directors (supervisors) include financial expert(s) on the board for the GAAP sample. About 10% (35%) of listed firms voluntarily formed independent directorships or supervisorships before February 22, 2008 for the full (GAAP) sample.

Table 2. Descriptive Statistics for Dependent and Independent Variables

Panel A: Full sample

Variable

N

Mean

Standard deviation

Lower quartile

Median

Upper quartile

ADA

2,237

0.0736

0.0793

0.0226

0.0516

0.0959

DA

2,237

-0.0011

0.1081

-0.0583

-0.0079

0.0426

INBD

2,237

0.1549

0.2928

0.0000

0.0000

0.2500

INSR

2,237

0.1087

0.1897

0.0000

0.0000

0.3333

INBD_DV

2,237

0.2678

0.4429

0.0000

0.0000

1.0000

INSR_DV

2,237

0.2727

0.4454

0.0000

0.0000

1.0000

IDFE

2,237

0.1547

0.3617

0.0000

0.0000

0.0000

ISFE

2,237

0.1627

0.3692

0.0000

0.0000

0.0000

VOLUNTARY

2,237

0.1015

0.3020

0.0000

0.0000

0.0000

SIZE

2,237

14.8364

1.3677

13.8654

14.6750

15.6152

LEV

2,237

0.3306

0.2520

0.1864

0.3765

0.5349

BIG5

2,237

0.8538

0.3534

1.0000

1.0000

1.0000

LAGDA

100

-0.0032

0.1276

-0.0621

-0.0086

0.0427

LAGADA

100

0.0805

0.0991

0.0234

0.0522

0.1036

CFFO

2,237

0.0732

0.1498

0.0087

0.0681

0.1314

F_INSTI

2,237

4.4388

8.8021

0.0000

0.4100

4.8469

MGT

2,237

0.8635

1.9250

0.0000

0.0800

0.7600

A_CHNI

2,237

0.0279

0.0917

-0.0080

0.0174

0.0545

LOSS

2,237

0.1073

0.3095

0.0000

0.0000

0.0000

ROA

2,237

0.0653

0.0956

0.0183

0.0605

0.1158

ROA2

2,237

0.0134

0.0252

0.0013

0.0052

0.0151

Panel B: The GAAP sample

Variable

N

Mean

Standard deviation

Lower quartile

Median

Upper quartile

ADA

654

0.0848

0.0763

0.0294

0.0640

0.1172

DA

654

0.0021

0.1141

-0.0659

-0.0043

0.0632

INBD

654

0.5297

0.3078

0.3333

0.5000

0.7500

INSR

654

0.3717

0.1591

0.3333

0.3333

0.3333

INBD_DV

654

0.9159

0.2777

1.0000

1.0000

1.0000

INSR_DV

654

0.9327

0.2507

1.0000

1.0000

1.0000

IDFE

654

0.5291

0.4995

0.0000

1.0000

1.0000

ISFE

654

0.5566

0.4972

0.0000

1.0000

1.0000

VOLUNTARY

654

0.3471

0.4764

0.0000

0.0000

1.0000

SIZE

654

14.3671

1.2283

13.5333

14.2227

14.9991

LEV

654

0.3896

0.1509

0.2723

0.3824

0.5006

BIG5

654

0.8853

0.3189

1.0000

1.0000

1.0000

LAGDA

654

-0.0037

0.1591

-0.0790

-0.0128

0.0621

LAGADA

654

0.1022

0.1219

0.0329

0.0728

0.1249

CFFO

654

0.0894

0.1332

0.0170

0.0821

0.1548

F_INSTI

654

4.8026

9.8405

0.0000

0.6500

4.8200

MGT

654

1.3880

2.2897

0.0100

0.3900

1.8000

A_CHNI

654

0.0595

0.0664

0.0162

0.0393

0.0781

LOSS

654

0.0474

0.2127

0.0000

0.0000

0.0000

ROA

654

0.0976

0.0902

0.0438

0.0893

0.1463

ROA2

654

0.0176

0.0251

0.0028

0.0085

0.0221

ADA = absolute value of discretionary accruals calculated by using the modified Jones model after controlling for firm performance.DA = discretionary accruals calculated by using the modified Jones model after controlling for firm performance.INBD = percentage of independent directors on the board.INSR = percentage of independent supervisors on the supervisory board.INBD_DV = indicator variable coded 1 if there is at least one independent director on the board, and 0 otherwise.INSR_DV = indicator variable coded 1 if there is at least one independent supervisor on the board, and 0 otherwise.IDFE = indicator variable coded 1 if at least one independent director is a financial expert, and 0 otherwise.ISFE = indicator variable coded 1 if at least one independent supervisor is a financial expert, and 0 otherwise.VOLUNTARY = indicator variable coded 1 if a ...