Ownership concentration, board structure and earnings management: Malaysian evidence / Yvonne Joseph Ason

This study attempts to provide evidence as to the association between those companies having effective and ineffective internal governance mechanisms with the level of discretionary accruals. In order to achieve the objectives, the earnings management as represented by discretionary accruals have been regressed on the governance variables namely, ownership concentration and proportion of independent directors. The study is based on a sample of 961 observations of the companies that fulfilled the selection criteria from the year 2002 until the year 2005. This study employed the modified Jones model (Dechow et al., 1995) to obtain the discretionary accruals. Meanwhile, linear regression is used to examine the association between discretionary accrual and levels of effectiveness of the governance structure of the firm. The results from the regression show that there is a significant negative relationship between the dummy variable with the level of discretionary accruals. These results imply that the earnings management is higher in a company with ineffective internal governance mechanism. The present study also documents evidence that managers are highly influenced by the largest shareholder to engage in opportunistic earnings management. Therefore, the findings suggest that regulators and authorities concerned should enforce laws and regulations insisting the company maintain good internal governance mechanisms. Besides, academicians must continue to search for other corporate governance mechanisms that help to mitigate earnings management. This is important in preventing the opportunistic earnings management at its early stage before it becomes excessive and finally become a fraud. If the opportunistic earnings management can be reduced at its early stage, investors' wealth will be more well protected.