Corporate governance, political connections and earnings quality: evidence from Egypt / Dalia Ali Mostafa Hemdan

The current study examined the influence of internal and external corporate governance mechanisms on the quality of reported earnings (FREQ) for firms in Egypt. Internal corporate governance in this study consisted of CEO duality, board gender diversity, board independence, CEO compensation, audit committee size, audit committee meetings frequency, and audit committee independence, whereas external corporate governance in this study consisted of audit quality and ownership structure - foreign ownership and institutional ownership. Additionally, this study examined the moderating role of political connections in the relationships of internal corporate governance mechanisms with FREQ. With that, data of listed non-financial firms from 2008 to 2019 were obtained. The results revealed the negative influence of CEO duality and CEO compensation and the positive influence of Gender_2 (represented the presence of two female directors on the corporate board) and Gender_3 (represented gender critical mass) on FREQ. Besides that, this study demonstrated the positive influence of audit committee meetings frequency, audit committee independence, audit quality, foreign ownership, and institutional ownership on FREQ. The obtained results also revealed the moderating role of political connections on the negative relationships of CEO duality, gender_1, gender_2, CEO compensation, and board independence on FREQ. However, this study found no evidence on the moderating role of political connections in the relationships of the characteristics of audit committee with FREQ. Overall, this study contributed significant implications to the existing body of literature by supporting the view that strong internal corporate governance mechanisms (i.e., board gender diversity, audit committee meeting frequency, and audit committee independence) and external corporate governance mechanisms (i.e., audit quality, foreign ownership, and institutional ownership) improve the quality of reported earnings within the Egyptian context. The argument strongly supports the view that corporate governance can minimise agency conflicts by addressing the negative implications of information asymmetry. This study presented evidence on the negative role of political connections in the quality of earnings for firms in Egypt. Through additional tests, this study also proved the robustness of the main results and justified the positive implications of the quality of firms’ reported earnings. This study presented significant theoretical and practical implications in the Egyptian context.