Restricting earnings management through corporate governance mechanismsevidence from Jordan

Supervised by:
  1. Beatriz Aibar Guzmán Director
  2. Modar Ali Ishaq Abdullatif Co-director

Defence university: Universidade de Santiago de Compostela

Fecha de defensa: 09 January 2019

  1. Isabel María García Sánchez Chair
  2. Juan Piñeiro Chousa Secretary
  3. Miriam Núñez Torrado Committee member

Type: Thesis


As a global response to the accounting failures era and to restore public confidence and credibility in the financial statements, more concerted efforts have been conducted throughout the world to improve the investment environment. Corporate governance mechanisms stand out as one of the key solutions for guaranteeing the integrity and quality of financial reporting and mitigating agency problems. In this sense, many developed and developing countries have focused the corporate governance reformations on several pivotal mechanisms such as audit quality, the board of directors’ attributes and the audit committee’s characteristics. The relationship between corporate governance mechanisms and earnings management has been analyzed extensively in literature. However, most studies have been focused largely on Anglo-Saxon countries and Western European countries, narrowing the potential generalization of findings to developing markets where corporate governance mechanisms function differently. As a result, there is a lack of knowledge about the role of corporate governance mechanisms in developing countries and their effectiveness in deterring earnings management practices. This thesis aims to explore the role of three corporate governance dimensions, namely audit quality (auditor size and audit fees), the board of directors (board size, board independence, board financial expertise, board meetings, CEO duality and political connection ) and audit committees (audit committee size, audit committee independence, audit committee expertise and audit committee meetings), in restricting discretionary accruals (as a proxy for earnings management practices) in a sample of Jordanian manufacturing firms over the period 2012-2016. Jordan was selected because it provides a unique institutional setting, which is generally characterized by concentrated ownership, code law tradition, lower investor protection and a small proportion of quoted firms, where earnings management behaviors are more likely. The results regarding the first dimension show that audit quality attributes (auditor firm size and audit fees) have no significant effect on earnings management. We do not find evidence that auditor size works as a constraint for earnings management, neither do we find that audit fees have an impact. With regard to the second dimension, the results indicate that the board of directors’ attributes (board size, board independence, board financial expertise, CEO duality and political connection) do not significantly affect earnings management activities. However, the results indicate a significantly positive relationship between the number of board meetings and earnings management suggesting that in Jordan board meetings are less effective in lessening earnings management activities. Finally, the empirical results regarding the audit committee’s attributes show that the audit committee independence is the only variable which has a negative and statistically significant relationship with the absolute value of discretionary accruals while the other analyzed variables (audit committee size, audit committee expertise and audit committee meetings) do not contribute to decrease the magnitude of discretionary accruals. The primary outcomes of the thesis are hugely bolstered by a variety of sensitivity and robustness analyses. Overall, the research contributes to previous literature, first, by providing a comprehensive assessment of the effectiveness of several corporate governance mechanisms in restricting earnings management by considering a broad range of key attributes and, second, by shedding light on the extent to which such mechanisms are able to restrict earnings management practices in a developing country, Jordan, whose cultural, economic and institutional context is very different from most previously analyzed countries’ context. Results from this thesis may also be potentially significant for key related stakeholders, regulators and auditing standards setters, investors, analysts and academics, particularly on matters linking to corporate governance mechanisms and earnings management.