Corporate disclosure and earnings management: The moderating role of corporate governance mechanisms

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Abstract

Notwithstanding the enormous amount of regulation and standards governing the financial reporting process, corporate failures and prior research have strongly indicated that earnings management (EM) is becoming a regular business practice in most firms today. Although this practice is more common in developed economies, there is limited research on corporate governance (CG) failures that have occurred in East Africa’s emerging economies. In this study, therefore, we examine whether corporate governance mechanisms (CGM) moderate the association between corporate disclosure (CD) and EM using evidence from listed firms at the Uganda Securities Exchange (USE). We employ disclosure and corporate governance indices to measure the extent of CD and corporate governance. Additionally, we use the magnitude of discretionary accruals (DACC) obtained from the modified Jones model as a proxy for EM. We find that audit committee (AC) characteristics have a negative and significant moderating effect on the association between CD and EM. Our study contributes to the growing strand of literature on the moderating or complimentary effect of CGM in constraining EM in the context of an emerging economy.

Keywords: Corporate Disclosure, Corporate Governance, Earnings Management

Authors’ individual contribution: Conceptualization — R.O.E.; Methodology — R.O.E. and B.O.; Formal Analysis — B.O.; Investigation — R.O.E. and J.O.; Resources — R.O.E., B.O., and J.O.; Writing — Original Draft — B.O.; Writing — Review & Editing — R.O.E. and J.O.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: C22, G21, Z19

Received: 25.06.2024
Accepted: 27.09.2024
Published online: 01.10.2024

How to cite this paper: Etengu, R. O., Opio, B., & Oder, J. (2024). Corporate disclosure and earnings management: The moderating role of corporate governance mechanisms. Reporting and Accountability Review, 1(1), 8–17. https://doi.org/10.22495/rarv1i1p1