Impact of Corporate Governance on Level of Earnings Management and Overall Firm Performance: A Review

Abstract

Large number of corporate scams in recent years has resulted in increased attention to the importance of corporate governance, earnings management mechanism, and firm performance. The sudden collapses of large business houses, mostly resulting out of bad governance, have negatively affected the securities markets globally. Considering the significance attached to corporate governance as a monitoring tool for firm performance, several empirical studies are undertaken by researchers in the context of corporate houses belonging to different developed countries. A review of the previous research shows that corporate governance practices influence earnings manipulation practices and also the overall firm performance. The earnings management practices through accruals management (basically equipped with the accounting engineering of discretionary accruals) have been emerging as one of the most concerned areas of research in the present time. The present study is an attempt to review the existing literature available on different conceptual models of corporate governance and establishing the fact that good governance leads to controlled earnings management practices and better firm performance. Majority of the literature has been focusing on the relationship among shareholders, stakeholders, directors, and management. Findings of these studies are mixed, and as a result it is often difficult for user to draw any firm conclusion on the relationship. Most of the research findings show that board composition significantly determines earnings management practices. However, no structured framework establishing such relationship is confirmed by the existing literature.

Keywords: Corporate Governance, Earnings Management, Discretionary Accruals, Firm Performance

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