SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
Good Corporate Governance, Information Asymmetry,
and Earnings Management
By
Sylvia Veronica NPS & Yanivi S. Bachtiar
Abstract
The purpose of this study is to investigate the relationship between corporate
governance, information asymmetry and earnings management. Prior research
indicated that information asymmetry negatively correlated with earnings
management (Richardson; 2001). As predicted, this study also shows significant
negative correlation between bid ask spread, as a proxy of information asymmetry,
and discretionary accruals, as a proxy of earnings management. In addition we
also test whether the practice of corporate governance will impact the level of
discretionary accruals and eventually affect market reaction. We use several
variables as proxy of corporate governance practice such as the existence of audit
committee, quality of audit, independent board member, and institutional ownership.
We find that only audit committee has significant relation with discretionary accruals.
The existence of audit committee is effectively constraining the level of earnings
management.
The study also find that discretionary accruals correlates negatively with
return, which provides evidence that market perceived the practice of earnings
managements derived by opportunistic motivation of managers. However, using
interaction between discretionary accruals and audit committee as well as
independent board members shows significant positive correlation. It indicates that
earnings management conducted by firms having audit committee and higher
percentage of independent board member will be valued positively by market. Since
market perceives earnings management as the result of efficient motivation, return
will eventually increase.
INTRODUCTION
Corporate governance has been an interesting topic for research at present.
Poor corporate governance has also been cited as one of the causes of the East Asian
financial crisis of 1997-1998, including Indonesia. While poor corporate governance
may not have triggered the East Asian crisis, the corporate governance practices in
East Asia may have made countries more vulnerable to a financial crisis and may
have exacerbated the crisis once it began. Recent research has highlighted the
importance of corporate governance in emerging markets. La Porta et al (1999)
demonstrate that, across countries, corporate governance is an important factor in
financial market development and firm value.
Asymmetry information was a condition where one party had more
information than the others. This condition will result in moral hazard and adverse
selection as cited in positive accounting theory. This in turn will disadvantage the
whole participants in market and distort the economic condition.
Financial reporting was meant to reduce asymmetry information between the
company and its stakeholders. The objective of financial reporting was to provide
information about the financial position, performance and changes in financial
position of an enterprise that is useful to a wide range of users in making economic
decisions. Financial statements also show the results of the stewardship of
management, or the accountability of management for the resources entrusted to it.
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SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
Those users who wish to assess the stewardship or accountability of management do
so in order that they may make economic decisions; these decisions may include, for
example, whether to hold or sell the investment in the enterprise or whether reappoint
or replace the management.
However, preparing financial statement will require a lot of judgments and
estimation. This provides flexibility for management to manage earnings for their own
advantages. Positive accounting theory refers to this practice as opportunistic earnings
management. Good corporate governance will provide mechanism to limit the
flexibility given by the accounting standard in order to prevent opportunistic earnings
management.
Accordingly this research is directed towards revealing any relation among the
related variables, which are corporate governance, information asymmetry, earnings
management and also firm value.
Research Questions:
1. Does good corporate governance and the level of information asymmetry affect
the level of earnings management?
2. Does good corporate governance and earnings management affect the value of the
firm?
Contribution:
Previous research had explained about the relationship between corporate
governance and earnings management. This research will try to enhance the
relationship by adding variable which represent asymmetry information. This research
will also investigate the impact of corporate governance and earnings management on
firm value.
Public companies are obligated to elect independent board members and form
audit committee. This study will give evidence whether board and audit committee
perform effectively as corporate governance mechanism that monitor earnings
management practices in the company.
LITERATURE REVIEW
Corporate Governance
La Porta et al. (1999) define corporate governance as a set of mechanisms
through which outside investors protect themselves against expropriation by insiders.
The agency theory suggests that corporate insiders tend to expropriate outside investors.
The expropriation by insiders also has a component that is related to the market condition
and is not diversifiable. In other words, insiders are expected to expropriate more when
the market is bad and less when market is good. This negative correlation between
expropriation and the market condition exaggerates the firm’s systematic risk and must be
compensated for by a higher expected return.
In particular, good corporate governance will constrain the degree of
expropriation in bad times. Research on the 1997-1998 Asian financial crisis provides
plenty of evidence. For example, Johnson et al. (2000), in Mitton (2002) find that weak
legal institutions for corporate governance can exacerbate the stock market decline in the
1997 financial crisis. Mitton (2002) finds that companies with better firm-level
governance had better market performance during the Asian financial crisis.
Several mechanisms contribute to the practice of corporate governance, such
as board independence, existence of audit committee, audit quality, and institutional
ownership. The board of directors (BOD) is central to the link between corporate
governance and performance of the management. Jensen (1993) contends that, while
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SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
the ostensible role of the BOD is to provide high-level counsel and oversight to the
management, corporate internal control problems often originate from the BOD itself.
He attributes the BOD’s governance failures to factors such as CEO’s agenda-setting
power, low equity ownership of the board members, overcrowding of the board, and a
board culture that encourages consent rather than dissent. Independence of the board
and the ownership of the board are two most often discussed attributes of the BOD.
The role of outside directors is emphasized with respect to board
independence. Fama and Jensen (1983) and others argue that including outside
directors as professional referees enhances the viability of the board and also reduces
the probability of top management colluding to expropriate shareholder wealth. There
is no general consensus on the perceived benefits of outside directors, however. For
example, Crystal (1991) argues that since outside directors are essentially hired by the
CEO, they are unlikely to assume an adversarial position to the CEO. Mace (1986)
and Patten and Baker (1987) offer similar views. Empirical evidence on outside
directors is also mixed. Byrd and Hickman (1992) report that, in the case of
acquisitions, bidding firms dominated by outside directors (board with more than 50%
of outside directors) have higher announcement-date stock price reaction than other
bidding firms. Rosenstein and Wyatt (1990) report that announcements of outside
director appointments are associated with positive excess returns. On the other hand,
Yermack (1996) and Mehran (1995) find no meaningful relation between the
percentage of outside directors and financial performance or firm value. Hermalin and
Weisbach (1991) and Bhagat and Black (1998) report similar results, showing little
correlation between various measures of board composition and firm performance. In
a related study, Core et al. (1999) report that the CEO is paid more if the board has
more outside directors, indicating that outsider-dominated board may not be as
effective a monitoring device as argued by many.
The audit committee must be composed of entirely non executive members to
be effective. A major shortcoming of this criterion is that non executive may not be
entirely independent of firm’s management. The board of directors may choose nonexecutive audit committee members who have an affiliation or business ties with
client firm and are less likely to be an effective monitor. However, non-executive
audit committee should provide effective monitoring mechanism due to their
independent nature. Therefore, their existence should improve the practice of good
corporate governance in the firm, which in turn will reduce information asymmetry
and opportunistic earnings management.
Audit quality according to DeAngelo (1981) is the probability an auditor will
(1) discover fraud in accounting system and (2) report the fraud. Therefore audit
quality should reinforce the quality of firm financial reporting and in turn will reduce
information asymmetry between firm management and firm shareholders. Prior
studies also report that good audit quality constrain opportunistic earnings
management (Becker et al 1998, Francis et al 1999).
Institutional ownership is another corporate governance mechanism in the
company. Institutions have the resources, abilities and opportunities to monitor and
discipline managers to focus more on long-term appreciation of firm-values.
The business community has expressed concern about the increasing power of
institutional investors in the market and their influence over corporate policies (ElGazzar 1998). Nussbaum and Dobrzynski (1987) report that institutions hold blocks
of securities and continually monitor corporate performance. Institutions with a large
stock ownership within a firm are likely to trigger more voluntary disclosures by
managers of that firm and can impose their investment objectives on firms by
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introducing motions and proposals at annual meetings, which counter management
policies (Hessel and Norman 1992).
Institutions with substantial investment in a firm’s common stock have
heightened incentives to monitor firm-management. Firms having concentrated
institutional shareholdings experience greater institutional monitoring and as a
consequence, have lower flexibility to use accruals to manage earning According to
the Financial Economists Roundtable Statement on Institutional Investors and
Corporate Governance (1999), with an increase in institutional investment in an
entity, the institutional interest to monitor management actions increases because of
the increasingly large economic stakes. Substantial ownership provides strong
incentives to institutions to actively monitor and influence management actions and
its various policy decisions. Mitra (2002) finds significant evidence that institutional
stockholders reduce management flexibility in generating abnormal accounting
accruals.
Information asymmetry
The existence of information asymmetry was perceived as a caused of earnings
management. Richardson (1998) argued that there was a systematic relationship between
the magnitude of information asymmetry and the level of earnings management.
Managements’ flexibility to manage earnings can be reduced by providing more qualified
information for outside parties. Hence the quality of financial report will reflect the level
of earnings management. There may also be outside monitors who curtail management’s
accounting choices, such monitoring can be provided by outside members of the board of
directors and the strength of audit committee.
Bhattacharya & Spiegel (1991) suggest that information asymmetry caused an
unwillingness to trade and increases the cost of capital as investors “price protect’
themselves against potential losses from trading with better informed market participants.
Lev (1998) argues that observable measure of market liquidity be used to identify the
perceived level of information asymmetry facing participants in equity markets. Bid ask
spreads are one such measure of market liquidity that has been used extensively in
previous research as a measure of information asymmetry between management and firm
shareholders. As evidence of the ability of bid ask to capture information environment of
the firm is provided by Healy et al (1995) who report evidence of negative relationship
between bid ask spread and the firm disclosure policy.
Analytical models have demonstrated that the existence of information
asymmetry between firm management and firm shareholders is a necessary condition for
the practice of earnings management. However there has been little empirical work
investigating this relationship. Lobo & Zhou (2001) argues that there is a negative
relationship between information asymmetry and earnings management.
The magnitude of information asymmetry affects the magnitude of earnings
management practiced by firm managers. When information asymmetry is “high”,
stakeholders do not have the necessary information to “look through” the manipulated
earnings. Earnings management may also result when shareholders have insufficient
resources, incentives, and access to relevant information to monitor managers’ actions,
which may give rise to the practice of earnings management (Warfield et al, 1995).
Earnings Management
Under Generally Accepted Accounting Principles (GAAP), firms use accrual
accounting which “attempts to record the financial effects on an entity of transactions and
other events and circumstances that have cash consequences for the entity in the periods
in which those transactions, events, and consequences occur rather than only in the period
in which cash is received or paid by the entity.” The nature of accrual accounting gives
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SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
managers a great deal of discretion in determining the actual earnings a firm reports in
any given period. Management has considerable control over the timing of actual expense
items (e.g., advertising expenses or outlays for research and development). They also can
to some extent alter the timing of recognition of revenues and expenses by, for example,
advancing recognition of sales revenue through credit sales, or delaying recognition of
losses by waiting to establish loss reserves (Teoh, Welch, and Wong, 1998a).
When manager incentives are based on their companies’ financial performance, it
may be in their self-interest to give the appearance of better performance through earnings
management. In many companies, managers are compensated both directly (in terms of
salary and bonus) and indirectly (in terms of prestige, future promotions, and job security)
depending on a firm’s earnings performance relative to some pre-established benchmark.
This combination of management’s discretion over reported earnings and the effect these
earnings have on their compensation leads to a potential agency problem. Beyond the
management compensation problem, earnings management may impact investors by
giving them false information. Capital markets use financial information to set security
prices. Investors use financial information to decide whether to buy, sell, or hold
securities. Market efficiency is based upon the information flow to capital markets. When
the information is incorrect, it may not be possible for the markets to value securities
correctly. To the extent that earnings management obscures real performance and lessens
the ability of shareholders to make informed decisions, we can view earnings
management as an agency cost.
Firm Value
Firms with good corporate governance should have more effective monitoring
mechanism that will make the firm operate more efficiently and this in turn will
improve firm value, as reported by previous study (Fuerst, 2000).
Previous research had tried to formulate relationship between firm value and
other factors related to corporate governance, such as board composition and board
size. However, empirical evidence on outside directors is mixed. Rosenstein and
Wyatt (1990) report that announcements of outside director appointments are
associated with positive excess returns. On the other hand, Yermack (1996) and
Mehran (1995) find no meaningful relation between the percentage of outside
directors and financial performance or firm value. In a related study, Core et al. (1999)
report that the CEO is paid more if the board has more outside directors, indicating
that outsider-dominated board may not be as effective a monitoring device as argued
by many.
Board size is often linked to BOD effectiveness. Empirically, Yermack (1996)
finds an inverse association between board size and firm value (Tobin’s Q). Eisenberg,
et al. (1998) also report a negative correlation between board size and profitability for
mid- and small capitalization Finnish firms.
RESEARCH METHOD
Hypothesis Development
Following our explanation in literature review, we would expect information
asymmetry, board independence, institutional ownership, audit quality, and audit
committee to affect the level of earnings management.
Hypothesis 1:
H1a : Bid ask spread has significant coefficient
H1b : Institutional ownership has significant coefficient
H1c : Audit firm size has significant coefficient
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SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
H1d
H1e
: Board independence has significant coefficient
: Audit committee existence has significant coefficient
We also hypothesize that discretionary accruals affect firm value.
Discretionary accruals could has positive or negative coefficient depends on market
perception about the underlying earnings management motivation (efficient or
opportunistic). We also expect institutional ownership and corporate governance
variables (audit quality, board independence, and audit committee) have moderating
impact on firm value.
H2a : Discretionary accrual has significant coefficient
H2b : Interaction between institutional ownership and discretionary accrual
has positive and significant coefficient
H2c : Interaction between audit firm size and discretionary accrual has
positive and significant coefficient
H2d : Interaction between board independence and discretionary accrual has
positive and significant coefficient
H2e : Interaction between audit committee existence and discretionary accrual
has positive and significant coefficient
Research Model
Research model to test hypothesis 1:
ABSDACt = α0 + α1BIDASKt + α2INSTt + α3AUDITt + α4BODt + α5AUDCOMt +
α6SIZE t + α7DEBT t + α8 GROWTH t + ε
(1)
Expectation: α1 = 0, α2 = 0, α3 = 0, α4 = 0, α4 = 0, α5 = 0
Where:
ABSDACt
BIDASKt
= the absolute value of discretionary accrual
= mean bid-ask spread at the end of the month for 12 period ending
December 31.
= proportion of institutional ownership
= proportion of independent board
= existence of audit committee
= dummy variable for audit quality, 1 for big 4 firms and 0 for
others
= ratio of total debt to total asset
= sales growth
INSTt
BODt
AUDCOMt
AUDITt
DEBTt
GROWTHt
Research model to test hypothesis 2:
RETt = β0 + β1CFOt + β2NDACt + β3DACt + β4DACt*INST + β5DACt*AUDIT +
β6DACt*BOD + β7DACt*AUDCOM + β8SIZE t + β9 BM t + β10EP t + ε
(2)
Where:
RETt
CFOt
NDACt
DACt
SIZEt
BMt
EPt
=
=
=
=
=
=
=
market adjusted return
cash flows from operating activities
nondiscretionary accruals
discretionary accruals
natural logarithm of market capitalization
book-to-market
earnings-to-price
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Sample Selection
The sample for the study is comprised of all firms listed on Jakarta Stock Exchange
that are non-regulated and non-financial in nature. In addition, the firms selected have
fiscal year end of December 31. The sample period is from 2001 to 2002. The
following criteria are applied in selecting firms for the sample:
1) Firms have a December 31 fiscal year-end.
2) The data on the variables used in the models are available for each year in the
sample period.
3) Financial, telecommunication, and real estate and property companies are
excluded.
Variables Operation
Corporate Governance
1. Board independence: Proportion of independent board is gathered from BEJ
Independent Board Announcement.
2. Audit committee: The existence of audit committee is gathered from BEJ audit
committee Announcement.
3. Audit quality: Audit quality is proxy by auditor size, where the companies whose
audit done by Big 4 are considered have high audit quality and the companies
whose audit done by Non Big 4 are considered have low audit quality.
Information Asymmetry
Information asymmetry is measured using mean of bid-ask spread at the end
of month for 12 period ending December 31.
Earnings Management
Earnings management is measured using discretionary accruals. Our approach in
decomposing accruals into nondiscretionary and discretionary component is based on
the modified Jones model in Kasznik (1999):
ACCRt/TAt-1 =  [1/TAt-1] +  [REVt/TAt-1 - RECt/TAt-1] +  [PPEt/TAt-1] + 
[CFOt/TAt-1] +et
Where:
ACCRt
= total accrual (net income before extraordinary items less cash flow
from operation)
∆REVt
= change in sales revenue in year t
∆RECt
= change in net receivables in year t
PPEt
= gross value of property, plant, and equipment in year t
TA t-1
= total assets previous year
CFOt
= change in cash flow from operation in year t
Where the fitted value is the nondiscretionary accruals and the residual is the
discretionary accruals.
Firm value
Firm value is measured using stock return. Return is measured using market adjusted
return, which is the difference between firm cumulative return and market return, for
12 months ending 3 months (March 31) after fiscal year end.
RESULTS
Table 1 provides descriptive statistics for total samples of the two models. The
table shows that nondiscretionary accruals have negative average due to depreciation
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of fixed assets. Nondiscretionary accruals tend to be less fluctuating than
discretionary accruals as it has lower standard deviation. The average of institutional
ownership percentage is 8.61%, meaning on average institutional investors owned
only small percentage in the ownership of public companies. Meanwhile the
proportion of independent board of 33, 49% indicates that the companies elected
independent board in minimum proportion as required by the regulators which is 30%.
Table 2 presents the result of the regression on discretionary accrual. BIDASK
has positive estimate with high significant level. Consistent with our hypotheses, the
significant coefficient of BIDASK provides an evidence of positive relationship
between the extent of information asymmetry with the level of earnings management
conducted by the firm.
Meanwhile, corporate governance variables, (i.e. institutional ownership, audit
quality and percentage of independent board) do not correlate significantly with
discretionary accruals. However, coefficient of AUDCOM variable is significant at
5% confident level as predicted in the hypotheses. This provides evidence that the
existence of audit committee limits the flexibility to manage earnings. Coefficients of
control variables, i.e. DEBT and GROWTH are statistically significant.
Regression result for the second model is presented in table 4. Discretionary
accruals has negative significant coefficient, which indicates that discretionary
accruals significantly influence return. The negative sign shows that market react
negatively toward earnings managements as the result of opportunistic motivation. As
market indicates the opportunistic motivation, it negatively valued earnings presented
in the financial statements.
Interacting variables between discretionary accruals and other variables shows
different results. Variables that represent interaction between discretionary accruals
and both institutional ownership and audit quality do not have significant coefficient
towards return.
Meanwhile, interaction between discretionary accruals and independent board
member shows significant positive coefficient. This is explained as the higher the
percentage of independent board, the more influence discretionary accruals has on
return.
Other interacting variable, between discretionary accruals and audit
committee, also shows positive significant coefficients. It shows evidence that market
positively valued discretionary accruals of companies having audit committee as
required by BEJ (as indicated with higher return).
CONCLUSION
Result of the test indicates that earnings management is significantly
influenced by bidask spread and the existence of audit committee. Regression result
shows that bid ask spread has significant positive coefficient which provides evidence
that higher information asymmetry leads to higher earnings managements as
represented by discretionary accruals. On the other hand, the existence of audit
committee limits the practice of earnings management.
Discretionary accrual negatively correlates to return, which means market is
aware of opportunistic motivation beneath the practice of earnings management
conducted by the firms. Consequently, higher discretionary accrual will lead to lower
return. Interacting variables between discretionary accrual and audit committee as
well as independent board have significant positive correlation with return. This
indicates earnings management conducted by firms having audit committee and
higher percentage of independent board member will be valued positively by market.
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Since market perceives earnings management as the result of efficient motivation,
return will eventually increase.
Limitation of Study
1. This study use Jones model to segregate discretionary and nondiscretionary
components of accruals. This model has several limitations which in turn will
affect the result of the study.
2. Measurement of institutional ownership requires further detailed data of major
investors industry. This specific information was not provided for all sample used
in this research. Firms with no further details on investors industry was classified
as having no institutional ownership. Consequently percentage of institutional
ownership for sample used is possibly undervalued which explains insignificant
coefficient of institutional ownership
3. Measurement of corporate governance was represented through audit quality,
independence board member and existence of audit committee. These three
variables could not measure comprehensively the practice of corporate
governance within firms. These variables were used as proxy of corporate
governance. The available corporate governance performance index (CGPI)
published by Swa Magazine is not available for all samples.
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Lampiran
Tabel 1 Descriptive Statistics
Model 1
ABSDAC
BIDASK
INST
AUDIT
BOD
AUDCOM
SIZE
DEBT
GROWTH
Mean Median Maximum Minimum
0.0873 0.0651
0.4809
0.0007
0.8664 0.8071
13.2232
-9.7961
0.0861 0.0000
0.7737
0.0000
0.8036 1.0000
1.0000
0.0000
0.3349 0.3333
0.8000
0.0000
0.5964 1.0000
1.0000
0.0000
11.8934 11.8886
16.6279
7.6709
0.7930 0.6616
5.3509
0.0392
0.1237 0.0984
4.6492
-0.8953
Std. Dev.
0.0818
1.8821
0.1550
0.3980
0.1373
0.4915
1.7082
0.7060
0.4857
ABSDAC = the absolute value of discretionary accrual, BIDASK = mean bid-ask spread at the end of
the month for 12 period ending December 31, INST = proportion of institutional ownership, BOD =
proportion of independent board, AUDCOM = existence of audit committee, AUDIT = dummy
variable for audit quality, 1 for big 4 firms and 0 for others, DEBT = ratio of total debt to total asset,
GROWTH = sales growth.
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Model 2
Mean
Median
0.0818 0.1157
RET
0.0675 0.0533
CFO
-0.0458 -0.0352
NDAC
0.0012 0.0060
DAC
0.0006 0.0000
DAC*INST
0.0032 0.0000
DAC*AUDIT
0.0016 0.0000
DAC*BOD
DAC*AUDCOM 0.0027 0.0000
11.9720 11.9452
SIZE
0.6667 1.1494
BM
0.1184 0.1269
EP
Maximum
1.4105
0.4307
0.0712
0.3875
0.1301
0.3875
0.1517
0.3494
16.6279
20.0000
12.5000
Minimum
-1.2636
-0.2783
-0.2480
-0.4809
-0.1787
-0.4809
-0.1603
-0.4639
8.1197
-33.3333
-8.3333
Std. Dev.
0.4389
0.1058
0.0601
0.1170
0.0208
0.1035
0.0416
0.0867
1.6350
5.0793
1.7497
RET = market adjusted return, CFO = cash flows from operating activities, NDAC = nondiscretionary accruals,
DAC = discretionary accruals, INST = proportion of institutional ownership, BOD = proportion of independent
board, AUDCOM = existence of audit committee, AUDIT = dummy variable for audit quality, 1 for big 4 firms
and 0 for others, SIZE = natural logarithm of market capitalization, BM = book-to-market, EP = earnings-to-price.
Table 2
Model 1 Regression Result
Variable
Coefficient t-Statistic
C
0.0645
4.2735
BIDASK
0.0011
11.7669
INST
0.0146
1.1572
AUDIT
-0.0037
-0.6683
BOD
0.0118
1.2566
AUDCOM
-0.0082
-2.2945
SIZE
-0.0003
-0.2791
DEBT
0.0269
4.6802
GROWTH
-0.0080
-2.7751
p value
0.0000
0.0000 ***
0.2482
0.5045
0.2100
0.0225 **
0.7804
0.0000 ***
0.0059 ***
Dependent variable: ABSDAC = the absolute value of discretionary accrual
Independent variables: BIDASK = mean bid-ask spread at the end of the month for 12 period ending
December 31, INST = proportion of institutional ownership, BOD = proportion of independent board,
AUDCOM = existence of audit committee, AUDIT = dummy variable for audit quality, 1 for big 4
firms and 0 for others, DEBT = ratio of total debt to total asset, GROWTH = sales growth
*significant at 1% **significant at 5% ***significant at 10%
68
SNA VII DENPASAR – BALI, 2-3 DESEMBER 2004
Table 3
Model 2 Regression Result
Variable
Coefficient t-Statistic
C
0.0496
0.5397
CFO
0.4985
3.8685
NDAC
2.0472
9.7464
DAC
-1.2603
-2.9715
DAC*INST
-0.5881
-0.6473
DAC*AUDIT
0.1494
0.4845
DAC*BOD
2.7487
5.8705
DAC*AUDCOM
0.5851
2.5623
SIZE
0.0068
0.9093
BM
0.0001
0.0393
EP
0.0261
2.8803
p value
0.5898
0.0001 ***
0.0000 ***
0.0032 ***
0.5180
0.6284
0.0000 ***
0.0110 **
0.3641
0.9687
0.0043 ***
Dependent variable: RET = market adjusted return
Independent variables: CFO = cash flows from operating activities, NDAC = nondiscretionary accruals, DAC =
discretionary accruals, INST = proportion of institutional ownership, BOD = proportion of independent board,
AUDCOM = existence of audit committee, AUDIT = dummy variable for audit quality, 1 for big 4 firms and 0 for
others, SIZE = natural logarithm of market capitalization, BM = book-to-market, EP = earnings-to-price
*significant at 1% **significant at 5% ***significant at 10%
69