INFLUENCE OF CORPORATE GOVERNANCE MECHANISMS ON EARNINGS MANAGEMENT IN DEVELOPING COUNTRIES (COMPARATIVE STUDY BETWEEN JORDANIAN AND MALAYSIAN INDUSTRIAL SECTOR)

Abstract

This study investigates the association between corporate governance mechanisms and financial performance by detect earnings management in the Jordanian and Malaysian industrial sectors. We identify the most important corporate governance mechanisms that have an effect on accounting choices and operating decisions, and finally, determine which accruals model is more powerful to estimate the values of earnings management of Jordanian and Malaysian industrial companies. Historically, corporate governance mechanisms are considered to be the most important factors in assessing and monitoring the effectiveness of financial reporting, and may be considered to be a cornerstone of control in general. Internal and external corporate governance is established by senior managers to improve the efficiency and effectiveness of operations and reduce the incidence of error or manipulation in accounting systems. Earnings management is considered one of the most important issues related to financial reporting, particularly after the Enron and WorldCom scandals. Earnings management behaviours are also related to low levels of corporate social responsibility and improvements in both areas would be expected to lead to improvements in the quality of corporate governance. We selected four of internal corporate governance mechanisms (Board of directors’ characteristics, Audit committee characteristics, External audit factors, Ownership structure) which have the most effects on earnings management practises, and it is considered as independent variables of this research. This research used Quantitative method. The quantitative analysis used accruals models the Standard Jones model (Jones 1991), modified Jones model (Dechow, Sloan and Sweeney, 1995), and the Peasnell, Pope and Young (2005) as measures of earnings management and used these variables in conjunction with corporate governance factors. Annual financial reports that were published by the Amman stock market over the period 2013 to 2019 were used to extract the data for corporate governance characteristics of the firms.