Earnings Management in Small Listed Firms in Malaysia Using Quantile Regression
Abstract
This study examines the role of board independence and audit committee expertise in accounting on earnings management in small listed firms in Malaysia, which have been neglected in corporate governance research. Due to their small size, the listing requirements imposed on them by Bursa Malaysia are less stringent. Hence, these firms are predicted to have a higher tendency to manage earnings compared to large listed firms. All firms listed on the Bursa Malaysia ACE Market during the financial years 2012 to 2014 inclusive were selected. The data were analysed using quantile regression to enable the determination of the effects of the corporate governance variables across the quantiles in the conditional distribution of discretionary accruals. The results show that small listed firms have a very high propensity for accrual management compared to large listed firms. The study also reveals that board independence is not associated with either the incidence of accrual management or the direction of discretionary accruals. It also shows that audit committee expertise can mitigate the propensity for discretionary accruals and if discretionary accruals are present, the objective was to reduce the firm’s earnings. However, this evidence only holds in firms where the utilization of discretionary accruals is pervasive.
References
Abdullah, S. N. (1999). The role of corporate governance and ownership structure on accounting earnings quality (Unpublished PhD Dissertation). Universiti Utara Malaysia, Kedah, Malaysia.
Abdullah, S. N. (2004). Board composition, CEO duality and performance among Malaysian listed companies, Corporate Governance, 4(4), pp. 47-61. https://doi.org/10.1108/14720700410558871
Abdullah, S. N., & Mohd Nasir, N. (2004). Accrual management and the independence of the boards of directors and audit committees. International Journal of Economics, Management and Accounting, 12(1), 1-31.
Abdullah, S. N., Che A Halim, N. F., & Puat Nelson, S. (2014). The impact of new regulations on earnings quality among Malaysian firms. International Journal of Economics, Management and Accounting, 22(2), 21-68.
Abdullah, S. N., & Ismail, K. N. I. K. (2016). Women directors, family ownership and earnings management in Malaysia. Asian Review of Accounting, 24(4), 525-550. https://doi.org/10.1108/ARA-07-2015-0067
Abdullah, S. N., Ismail, K. N. I. K., & Nachum, L. (2016). Does having women on boards create value? The impact of societal perceptions and corporate governance in emerging markets. Strategic Management Journal, 37(3), 466-476. https://doi.org/10.1002/smj.2352
Abdul Rahman, R., & Mohamed Ali, F. H. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, 21(7), 783-804. https://doi.org/10.1108/02686900610680549
Al-Jaifi, H. A. (2017). Ownership concentration, earnings management and stock market liquidity: evidence from Malaysia. Corporate Governance, 17(3), 490-510. https://doi.org/10.1108/CG-06-2016-0139
Al-Rassas, A. H., & Kamardin, H. (2015). Directors' independence, internal audit function, ownership concentration and earnings quality in Malaysia. Asian Social Science, 11(15), 244-256. https://doi.org/10.5539/ass.v11n15p244
Anderson, R. C., & Reeb, D. M. (2003). Founding‐family ownership and firm performance: Evidence from the S&P 500. The Journal of Finance, 58(3), 1301-1328. https://doi.org/10.1111/1540-6261.00567
Bamahros, H. M., & Wan-Hussin, W. N. (2015). Non-audit services, audit firm tenure and earnings management in Malaysia. Asian Academy of Management Journal of Accounting and Finance, 11(1), 145-168.
Ball, R., & Shivakumar, L. (2005). Earnings quality of UK private firms: Comparative loss recognition timeliness. Journal of Accounting & Economics, 39(1), 83-128. https://doi.org/10.1016/j.jacceco.2004.04.001
Barton, J. (2001). Does the use of financial derivatives affect earnings management decisions? The Accounting Review, 76(1), 1-26. https://doi.org/10.2308/accr.2001.76.1.1
Bartov, E., Gul, F. A., & Tsui, J. S. L. (2000). Discretionary-accruals models and audit qualifications. Journal of Accounting and Economics, 30(3), 421-452 https://doi.org/10.1016/S0165-4101(01)00015-5
Basiruddin, R. (2011). The relationship between governance practices, audit quality and earnings management (Unpublished doctoral dissertation). Durham University.
Becker, C. L., Defond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1-24. https://doi.org/10.1111/j.1911-3846.1998.tb00547.x
Burgstahler, D. C., Hail, L., & Leuz, C. (2006). The importance of reporting incentives: Earnings management in European private and public firms. The Accounting Review, 81(5), 983-1016. https://doi.org/10.2308/accr.2006.81.5.983
Chen, X., Cheng, Q., & Wang, X. (2015). Does increased board independence reduce earnings management? Evidence from recent regulatory reforms. Review of Accounting Studies, 20(2), 899-933. https://doi.org/10.1007/s11142-015-9316-0
DeZoort, F. T., & Salterio, S. E. (2001). The effects of corporate governance experience and financial‐reporting and audit knowledge on audit committee members' judgments. Auditing: A Journal of Practice & Theory, 20(2), 31-47. https://doi.org/10.2308/aud.2001.20.2.31
Ding, Y., Zhang, H., & Zhang, J. X. (2007). Private vs. state ownership and earnings management: Evidence from Chinese listed companies. Corporate Governance: an International Review, 15(2), 223-238. https://doi.org/10.1111/j.1467-8683.2007.00556.x
Financial Reporting Act 1997 - Act 885 (1997). Laws of Malaysia. Kuala Lumpur: Parliament of Malaysia.
Financial Reporting Council. (2012). The UK Corporate Governance Code. London: Financial Reporting Council Ltd.
Financial Reporting Council (2016). The UK Corporate Governance Code. London: Financial Reporting Council Ltd.
Fudenberg, D., & Tirole, J. (1995). A theory of income and dividend smoothing based on incumbency rents. Journal of Political Economy, 126(5), 75-93. https://doi.org/10.1086/261976
Haniffa, R., & Hudaib, M. (2006). Corporate governance structure and performance of listed firms in Malaysia. Journal of Business Finance and Accounting, 33(7-8), 1034-1062. https://doi.org/10.1111/j.1468-5957.2006.00594.x
Hashim, H. A., & Devi, S. S. (2008). Board independence, CEO duality and accrual management: Malaysian evidence. Asian Journal of Business and Accounting, 1(1), 27-46. https://doi.org/10.1111/j.1475-679X.2008.00269.x
Hashim, H., & Devi, S. (2009). Board characteristics, ownership structure and earnings quality: Malaysian evidence, Corporate Governance in Less Developed and Emerging Economies Research in Accounting in Emerging Economies, 8, 97-123. https://doi.org/10.1016/S1479-3563(08)08004-3
Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383. https://doi.org/10.2308/acch.1999.13.4.365
Hope, O. K., Thomas, W. B., & Vyas, D. (2013). Financial reporting quality of U.S. private and public firms. The Accounting Review, 88(5), 1715-1742. https://doi.org/10.2308/accr-50494
Ishak, I, Haron, M. N., Nik Saleh, N. M. Z., & Abdul Rashid, A. (2011). Family control and earnings management, in 2nd International Conference on Economics and Business and Management Proceedings IPEDR 22, 82-86.
Jaggi, B., Sidney, L., & Gul, F. (2009). Family control, board independence and earnings management: Evidence based on Hong Kong firms. Journal of Accounting and Public Policy, 28(4), 281-300. https://doi.org/10.1016/j.jaccpubpol.2009.06.002
Jamil, N. N., & Puat-Nelson, S. (2011). An investigation on the audit committee effectiveness: The case for GLCs in Malaysia. Gadjah Mada International Journal of Business, 1393, 287-305. https://doi.org/10.22146/gamaijb.5484
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Jeter, D., & Shivakumar, L. (1999). Cross-sectional estimation of abnormal accruals using quarterly and annual data: effectiveness in detecting event-specific earnings management. Accounting and Business Research, 29, 299-319. https://doi.org/10.1080/00014788.1999.9729590
Johl, S., Jubb, C. A., & Houghton, K. A. (2007). Earnings management and the audit opinion: evidence from Malaysia. Managerial Auditing Journal, 22(7), 688-715. https://doi.org/10.1108/02686900710772591
Katmon, N., & Farooque, O.A. (2017). Exploring the impact of internal corporate governance on the relation between disclosure quality and earnings management in the UK listed companies. Journal of Business Ethics, 14(2), 345-367. https://doi.org/10.1007/s10551-015-2752-8
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of accounting and economics, 33(3), 375-400. https://doi.org/10.1016/S0165-4101(02)00059-9
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163-197. https://doi.org/10.1016/j.jacceco.2004.11.002
Mardjono, E. Y., & Chen, Y. S. (2020). Earnings management and the effect characteristics of audit committee, independent commissioners: evidence from Indonesia. International Journal of Business and Society, 21(2), 569-587. https://doi.org/10.33736/ijbs.3272.2020
Merchant, K. A., & Rockness, J. (1994). The ethics of managing earnings: an empirical investigation. Journal of Accounting and Public Policy, 13(1), 79-94. https://doi.org/10.1016/0278-4254(94)90013-2
Mohd-Saleh, N., Mohd Iskandar, T., & Rahmat, M. M. (2005). Earnings management and board characteristics: evidence from Malaysia, Jurnal Pengurusan, 24, 77-103. https://doi.org/10.17576/pengurusan-2005-24-04
Mohd-Saleh, N., Mohd Iskandar, T., & Rahmat, M. M. (2007). Audit committee characteristics and earnings management: evidence from Malaysia. Asian Review of Accounting 15(2), 147-163 https://doi.org/10.1108/13217340710823369
Nagar, V., Petroni, K., & Wolfenzon, D. (2002). Ownership and performance in close corporations: a natural experiment in exogenous ownership structure. Working Paper no. S-CF-02-06, New York University.
Prior, D., Surroca, J., & Tribó, J.A. (2008). Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility. Corporate Governance: an International Review, 16(3), 160-177. https://doi.org/10.1111/j.1467-8683.2008.00678.x
Securities Commission (2000). Finance Committee Report on Corporate Governance, Finance Committee on Corporate Governance. Kuala Lumpur, Malaysia.
Securities Commission (2007). Malaysian Code on Corporate Governance (Revised 2007). Kuala Lumpur: Securities Commission.
Securities Commission (2012). Malaysian Code on Corporate Governance 2012. Kuala Lumpur: Securities Commission.
Securities Commission (2017). Malaysian Code on Corporate Governance 2017. Kuala Lumpur: Securities Commission.
Stockmans, A., Lybaert, N., & Voordeckers, W. (2010). Socio-emotional wealth and accrual management in private family firms. Family Business Review, 23(3), 280-294. https://doi.org/10.1177/0894486510374457
Sun, J., Liu, G., & Lan, G. (2011). Does female directorship on independent audit committees constrain earnings management? Journal of Business Ethics, 99, 369-382. https://doi.org/10.1007/s10551-010-0657-0
Xie, B., Davidson, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: the roles of the board and the audit committee. Journal of Corporate Finance, 9, 295-316. https://doi.org/10.1016/S0929-1199(02)00006-8
Copyright (c) 2022 Shamsul Nahar Abdullah
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
