THE IMPACT OF OWNERSHIP TYPE ON THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND EARNINGS MANAGEMENT: AN EMPIRICAL STUDY

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Abstract

This study investigates the effect of ownership type on the relation between corporate governance and earnings management. While previous literature has mainly examined the relationship between corporate governance and both accrual and real earnings management, no study to date, to the researcher’s best knowledge, focused on the moderation effect of ownership type on this relationship. Three proxies for measuring accrual and real earnings management, namely discretionary accruals (DA), abnormal cash flows (ACFO), and abnormal discretionary expenses (ADISX) are employed. Three empirical models (i.e. DA, ACFO, and ADISX) are developed in which the earnings management proxies represent the dependent variables and are tested using a sample of non-financial companies containing state-owned and privately owned companies over the period from 2010 to 2017, with 1030 firm-year observations. The results show a positive relationship between ownership type and both accruals manipulation and sales manipulation. In general, the results suggest that the ownership type moderates the relationship between corporate governance and earnings management. The results suggest also that corporate governance mechanisms may not play an almost the same role in monitoring and mitigating real earnings management (REM) practices as they do for accrual earnings management (AEM) in Egypt. Moreover, no evidence is found supportive of the trade-off effect which means that managers in Egyptian firms use both types of earnings management jointly to reach the target levels of earnings.

Keywords: Ownership Type, Corporate Governance, Accrual Earnings Management, Real Earnings Management

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

Acknowledgment: I would like to express my deep appreciation to my first Ph.D. supervisor, Prof. Ahmed H. Behairy, for his support and guidance and to my co-supervisor Prof. Mohammed E. Abulezz, for his helpful comments and suggestions.

JEL Classification: M4, M41

Received: 08.05.2019
Accepted: 01.07.2019
Published online: 02.07.2019

How to cite this paper: Boghdady, A.B.A. (2019). The impact of ownership type on the relationship between corporate governance and earnings management: An empirical study. Corporate Ownership & Control, 16(4), 31-44. https://doi.org/10.22495/cocv16i4art3