[ Corporate Governance and Earnings Management ]

by

Contents

CHAPTER 1: INTRODUCTION4

Background4

Rationale for this Study5

Research Problem and Objectives5

Research Questions6

Structure of the Proposal7

CHAPTER 2: LITERATURE REVIEW8

Earnings Management8

Definition of Earning Management8

Agency Theory10

Earnings Management Incentives10

Stock Market Incentives10

Management Compensation Contracts Incentives11

Debt Contracts Incentives12

Corporate Governance in the UK12

CHAPTER 3: RESEARCH METHODOLOGY15

Introduction15

Summary of Research Methods15

Research Design16

Sample Selection18

Variables Identified in the Research19

Board of Directors19

Board Independence19

Board Meetings20

Board Size21

Board independence from management21

Audit Committee Meetings22

Audit Committee Independence23

Mathematical Description of Models23

Modified Cross-Sectional Jones (1991) Non-Discretionary Accruals Model24

Hypotheses Statement25

CHAPTER 4: FINDINGS27

CHAPTER 5: ANALYSIS36

CHAPTER 6: CONCLUSION44

CHAPTER 7: LIMITATION & RECOMMENDATION45

General45

Specific46

REFERENCES48

CHAPTER 1: INTRODUCTION

Background

This research study will examine the relationship of corporate governance with earnings management. The earnings of a firm have an important impact on its business activities and management decisions. There are two areas where earning play a pivotal role i.e. investors' evaluation of the company and the contractual outcomes associated with financial leverage and compensation of managers. Therefore, managers intend to adjust earning to the level required.

The concerns of CG and EM are very significant for the public, auditing profession as well as government regulators. The concern of earnings management is not new. However, its popularity has increased during the last few years. The topic of earnings management has attracted the attention of academic research, press, and regulators. The aim of corporate governance is to lower the deviation of interests that exist among shareholders and managers. The importance of corporate governance is magnified when the deviation from the interests of shareholders provide incentives. There are different examples that demonstrate the deviation of management from the interests of shareholders. One of these examples is earnings management through accounting accruals. The incidence of earnings management can be reduced through corporate governance. It is because corporate governance can improve the perceptions of investors about the reliability of a firm (Burgstahler & Dichev, 1997, pp. 99).

The mechanisms of corporate governance, audit committee, and board of directors possess the responsibility of monitoring managers. This task is performed on behalf of shareholders. The mechanisms of corporate governance and audit committee are also accountable for the regulation of the process of financial reporting. It depicts the importance of the role of the board of directors and audit committee in the retention of earning management. In public firms, the boards of directors are considered to be passive entities controlled by management. For the efficiency of the board as well as audit committee, diverse corporate governance publications, encompassing Cadbury report in the United Kingdom, have proposed recommendations. The recommendations presented in these reports are related to diverse aspects of corporate governance.

Rationale for this Study

The study conducted on corporate governance and earning management in the United Kingdom would enrich the literature available on the topic. The study will highlight important aspects related to board monitoring, corporate governance, and financial reporting in the UK firms. There are diverse studies that have highlighted the relationship between corporate governance and earning management. However, a number of previous studies are based on U.S. firms. The study conducted in this dissertation will provide empirical evidence for the case of the ...