Board governance and ownership structure as mechanisms to oversight earnings management: Insights from an emerging market

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Abstract

This paper investigates the effectiveness of board governance and ownership structures as mechanisms to mitigate earnings management in Palestinian non-financial firms. By analyzing the relationship between board effectiveness and ownership structure on earnings management across 27 companies listed on the Palestine Stock Exchange (PEX) from 2018 to 2022, the study employs multiple regression analysis to derive its findings. The study concludes that Palestinian non-financial companies participate in earnings management, often shaping financial statements to align with management objectives. Family ownership is identified as the most significant factor in reducing earnings management, as higher family ownership typically involves more oversight of management behavior. Board independence also plays a key role, as independent directors effectively monitor executive activities, enhancing performance. Companies audited by the Big Four experience less earnings management due to the quality audit services provided by these firms. Based on these findings, several recommendations are proposed: companies should increase board independence with a higher proportion of independent directors, reduce board size for improved communication, and ensure productive board meetings through structured agendas. Policies supporting family ownership structures and encouraging institutional investor involvement in governance could further enhance transparency. Additionally, engaging high-quality audit firms should be a priority due to their association with lower earnings management. Future research could explore cross-country comparisons, longitudinal studies on governance changes, sector-specific analyses, and qualitative studies on the motivations behind earnings management practices, providing deeper insights into the relationship between corporate governance and earnings management.

Keywords: Earnings Management, Board of Directors’ Effectiveness, Board Governance, Ownership Structure, Palestine Stock Exchange

Authors’ individual contributions: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: M12, M51, J24, L25

Received: 11.10.2024
Accepted: 24.01.2025
Published online: 28.01.2025

How to cite this paper: Turshan, M. N. (2025). Board governance and ownership structure as mechanisms to oversight earnings management: Insights from an emerging market. Corporate Board: Role, Duties and Composition, 21(1), 17–30. https://doi.org/10.22495/cbv21i1art2