The Role of corporate governance in constraining earnings management among Philippine publicly-listed companies

Abstract

The accounting phenomenon, earnings management, has been a major concern in the capital market because of its potentially massive damage to the shareholders’ wealth and the economy. Some analysts attributed this problem to weak corporate governance. Although several studies have investigated the association between corporate governance and earnings management in developed countries, little is known in the developing countries, particularly in the Philippines. In order to address the knowledge gap, this quantitative study analyzed the relationships between corporate governance variables and earnings management using the data gathered from the annual reports of all non-financial companies listed in the Philippine Stocks Exchange over the period 2013 to 2018. This dissertation utilized multiple regression analysis to determine the value relevance of board characteristics,

audit characteristics, ownership structure, and firm characteristics in predicting earnings management. The results reveal that earnings management increases with the increase in assets, leverage, and female representation in the board of directors, and it decreases when the corporation hires one of the big four auditing firms to certify its corporate financial statements. Therefore, the best model that predicts earnings management comprises four predictors: board diversity, auditor size, firm size, and leverage. Furthermore, this study did not find significant associations between earnings management and the board size, board independence, chief executive officer duality, multiple directorships, audit committee independence, audit committee financial expertise, ownership concentration, and managerial ownership. Thus, the finding reveals that corporate governance related to board and audit committee compositions and ownership structure, in general, plays an insignificant role in constraining earnings management. Firm characteristics—firm size and leverage—primarily determine the magnitude of earnings management. This finding supports the positive accounting theory. This research is significant in three ways: First, it contributes to the existing literature on corporate governance and earnings management by providing empirical evidence from the Philippines, a country where researchers have not sufficiently examined this topic. Second, it can serve as a policymakers’ reference for deliberating any possible amendments in the corporate governance regulations. Last, it orients the investors, analysts, board members, and other users of corporate financial reports about the factors that can trigger earnings management.