Corporate Governance and Earnings Management by Publicly Listed Companies in Bangladesh

Abstract

This study examines the relationship between corporate governance characteristics and earnings management practices among the listed companies at the Dhaka Stock Exchange (DSE) Ltd. In particular, the study examines the impact of the independent variables like ownership structure, board characteristics and audit committee characteristics. on earnings management. the dependent variable. Corporate Governance is a set of quality guidelines and policies that makes a company one of the global leaders. also guides them in ensuring quality at every sphere of their business. It is aimed at assisting management of the company in the efficient conduct of its business and in meeting its obligations to the stakeholders, and is guided by a strong emphasis of transparency, accountability, and integrity. Earnings Management is considered management's action to manipulate the true and actual performance of a company. The motivation behind this study is to contribute to literature the associations that exist between corporate governance characteristics and earnings management within the Bangladeshi context. Theoretically speaking, if the corporate governance (guidelines & policies) is applied in a company properly then the earnings management might be reduced. The research has been conducted by using both primary and secondary data. The primary data have been collected through quantitative as well as qualitative approaches whereas secondary data have been collected through reviewing different relevant articles, books, annual reports of listed companies. periodicals. journals etc. and relevant websites. The corporate governance attributes are organized in three categories: (i) Ownership Structure; (ii) Board Characteristics; and (iii) Audit Committee Characteristics. To be capable of measuring relationship between CG and EM. the dependent variable, Earnings management, has been quantified by discretionary accruals, using Modified Jones Model. Control variables, including firms' size (FSIZE). firms' performance (ROA), and leverage (LEVG) were used in the model in order to decrease the biasness of the independent variables. One model is constructed and a set of hypotheses is stated in the study. The model is tested using a sample of firms derived from the top 46 con-1panies listed on the DSE. The result reveals that managerial ownership (MA AGOWN), leverage (LEVG), and firm performance (ROA) are positively and significantly associated with earnings management (EM), whereas board size (BSIZE). audit committee meetings (ACMEET), and cash flows f om operating activities (CFO) are negatively associated with earnings management (EM) at different significant levels. The results on perception show that the four main incentives for Bangladeshi managers to manage earnings are ·to retain stable dividends; to report a reasonable profit and avoid loss: to increase the confidence of investors; to retain stable performance; to obtain position and reputation in the business market'. The findings of this study may be of potential interest to policy makers, professionals, the board of directors, external auditors. regulators, and investors in their attempts to constrain the incidence of earnings management and enhance monitoring mechanisms to increase the quality of financial reporting in Bangladesh.