EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
999
Earnings Management and
Corporate Governance in Asia’s
Emerging Markets
Chung-Hua Shen and Hsiang-Lin Chih*
This paper studies the impacts of corporate governance on earnings management. We use
firm-level governance data, taken from Credit Lyonnais Security Asia (CLSA), of nine Asian
countries, in addition to the country-level governance data used in past studies. Our conclusion is as follows. First, firms with good corporate governance tend to conduct less earnings
management. Second, there is a size effect for earnings smoothing, that is, large size firms are
prone to conduct earnings smoothing, but good corporate governance can mitigate the effect
on average. Third, there is a turning point for leverage effect, i.e. when the governance index is
large, leverage effect exists, otherwise reverse leverage effect exists. It shows that a highly
leveraged firm with poor governance is prone to be scrutinised closely and thus finds it harder
to fool the market by manipulating earnings. Fourth, firms with higher growth (lower earnings
yield) are prone to engage in earnings smoothing and earnings aggressiveness, but good
corporate governance can mitigate the effect. Finally, firms in stronger anti-director rights
countries tend to exhibit stronger earnings smoothing. This counter-intuitive result is different from Leuz et al. (2003).
Keywords: Corporate governance, earnings management, investor protection, emerging
markets
Introduction
S
tudies of earnings management (hereafter,
EM) have recently attracted a lot of attention because of the accounting fraud at Enron,
WorldCom, Xerox, Royal Ahold, HealthSouth,
and so on. The increasing attention to the
quality of reported earnings makes the study
of earnings management important again
(Levitt, 2000). Schipper (1989) and Healy and
Wahlen (1999) state that earnings management
is the alternation of firms’ reported economic
performance by insiders to either “mislead
some stakeholders” or to “influence contractual outcomes”. It is premised that insiders
engage in EM to dilute their rent-seeking
activities from outsiders. That is, EM is used to
reduce outsider interference and protect insiders’ private control benefits. For instance,
insiders can use their discretion in financial
reporting to inaccurately reflect firm perfor© 2007 The Authors
Journal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road,
Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
mance and consequently weaken outsiders’
ability to govern the firm.
Furthermore, investors who are concerned
with the stock returns examine the earnings
frequently. This heightens capital market
pressure and creates an additional incentive
for firms to engage in earnings manipulation.
The regular scrutiny of firms’ financial performances by financial analysts in the past
decades puts further pressure on firms to
maintain earnings momentum to fulfil the
expectation of the market (e.g. Barth et al.,
1999; Myers and Skinner, 2002). Thus,
knowing the factors that affect earnings management is helpful for investors to foresee the
variation of earnings. In particular, will a
company with good governance have less
incentive to conduct earnings management?
Past studies regarding governance factors
that affected the earnings management were
typically based on the country-level to account
Volume 15
*Address for correspondence:
Department of Cooperative
Economics, National Taipei
University 151, University Rd.,
San-Shia, Taipei 273, Taiwan,
Republic of China. Tel: (886)
2-86746874;
Fax:
(886)
2-86715905;
E-mail:
[email protected]
Number 5
September 2007
CORPORATE GOVERNANCE
1000
for the variations (e.g. Leuz et al., 2003). These
studies began with the finding that the laws
that protect investors differ significantly across
countries, in part because of differences in
legal origins (La Porta et al., 1998, hereafter,
LLSV). Leuz et al. (2003), for example, examined the relation between outside investor protection and earnings management across 31
countries using non-financial industries data.
They found that strong investor protection at a
country level reduces firms’ EM activities. In
contrast to the above studies using nonfinancial industries, Shen and Chih (2005)
employed data of financial industries to
calculate EM of 48 countries based on the
methodologies of Degeorge et al. (1999) and
Burgstahler and Dichev (1997). They then
followed the anti-director right, legal enforcement, accounting disclosure and inside
trading analysis technique of LLSV to account
for the variations of EM across the countries.
Their results show that accounting disclosure
is the more effective method that explains
variation of EMs across countries.
Many provisions of investor protection in a
country may not be binding for all firms since
firms have the flexibility in their corporate
charters and bylaws to either choose to “optout” and decline specific provisions or adopt
additional provisions not listed in their
legal code. Klapper and Love (2004) claimed
that firms could improve investor protection
rights by increasing disclosure, selecting
well-functioning and independent boards,
imposing disciplinary mechanism to prevent
management and controlling shareholders
from engaging in expropriation of minority
shareholders, and so forth. Hence, two firms
from the same country may perform varying
degrees of protection to their investors.
Namely, the relationship between the countrylevel legal infrastructure and the firm-level
corporate governance mechanisms is not a
one-to-one correspondence. Though Richardson et al. (2002) have used the firm-level financial ratios to predict earnings management,
they did not consider the role of corporate
governance.
The aim of this paper is to study how corporate governance affects EM of Asian countries
by using firm-level data. In a recent report,
Credit Lyonnais Securities Asia (hereafter
CLSA) calculated an index with corporate
governance rankings for 495 firms across 25
emerging markets and 18 sectors. The descriptive statistics presented in the CLSA report
show that companies that ranked high on the
governance index have better operating performance and higher stock returns. Klapper
and Love (2004) applied these governance
variables and found that better corporate
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Number 5
September 2007
governance is highly correlated with better
operating performance and market valuation.
Also applying CLSA governance measures,
Chen et al. (2003) found that both disclosure
and non-disclosure corporate governance
mechanisms have a significantly negative
effect on the cost of equity capital. Doidge et al.
(2004) also used CLSA data and found that
firms in less developed countries have less
incentive to improve firm-level governance
because outside finance is expensive and the
adoption of better governance mechanisms is
expensive. Except for these three papers, to the
best knowledge of authors, none have applied
the corporate governance data directly to
investigate the relevant issues. This paper uses
the same governance ranking produced by
CLSA to further investigate the relationship
between firm-level governance and firm-level
earnings management. Then, we studied how
the corporate governance affects the relationship between firms’ financial ratios and earnings management.
This paper is organised as follows. The next
section describes the construction of the
earnings management measures. We describe
the data of CLSA, followed by a section describing the econometric models. Empirical
tests results, and the robustness check are
presented. The final section presents the
conclusions.
Earnings management measures
Because insiders can exercise discretion along
a number of different dimensions, and the preferred earnings management method can
differ across countries, a single earnings management measure may not yield a complete
picture. Accordingly, we analysed four different measures of EMs. Our earnings measures
are the same as Leuz et al. (2003), who classified the earnings management into two kinds
of manipulations: earnings smoothing and
earnings discretion. Bhattacharya et al. (2003)
further classified the earnings management
into three categories: loss avoidance, earnings
smoothing and earnings aggressiveness. In
this paper, we followed Leuz et al.’s (2003)
approach in classifying earnings management
into earnings smoothing (EM1 and EM2 in our
notation below) and earnings aggressiveness
(EM3 below).1 The fourth EM measure is
simply the average of their rankings (AEM).
Because accounting earnings are the sum of
accruals and cash flow from operation, we first
introduce accruals and cash flow. The operational definition of accruals is:
Accrualsit = ( ΔCAit − ΔCashit ) − ( ΔCLit − ΔSTDit
− ΔTPit ) − Depit ;
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
DCAit = change in total current asset;
DCashit = change in cash/cash equivalents;
DCLit = change in total current liabilities;
DSTDit = change in short-term debt included
in current liabilities;
DTPit = change in income taxes payable;
Depit = depreciation and amortisation expense.
Once the accruals are obtained, we calculate
cash flow from operation.
Cash flow from operating =
operating earnings − Accruals
The first smoothing measure captures the
degree to which insiders use their discretion to
alter the accounting component of reported
earnings, that is, accruals, to reduce the variability of operating earnings:
EM1 = SD (operating earnings )
SD ( cash slow from operation ) ;
where SD represents standard deviation, and
cash flow from operation is the cash flow
defined above.
A low value of this measure is indicative of
insiders using their discretion to smooth
reported earnings. That is, the higher EM1
implies firms are less prone to manage earnings.
The second measure of earnings smoothing
is based on the contemporaneous correlation
between the change in accounting and the
change in operating cash flow.
EM 2 = Spearman ( ΔAccrual, Δcash flow
from operation ) ;
where Spearman is the Spearman correlation
coefficient. The concept of this measure is that
the insiders may also use their discretion to
report accounting accruals that offset economic shocks to the firm’s operating cash flow
that would otherwise affect reported earnings.
A negative correlation implies the use of
discretionary accounting accruals to offset
undesirable cash flow shocks, hence, a large
earnings management. Therefore, the higher
the EM2, the less is the tendency to manage
earnings.
The third measure is related to earnings
aggressiveness, which represents the insiders
that use their reporting discretion to misstate
the firm’s actual economic performance. It is
noted that accrual itself involves judgement of
managers; hence, the third measure simply
uses the magnitude of accruals as a proxy for
the amount of discretion insiders use to influence earnings. Thus, the insiders may manipulate the earnings by adjusting accruals to avoid
loss. For firm i, EM3 is equal to the average
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
1001
value of the magnitude of accruals scaled by
the absolute value of the firm’s cash flow from
operations to control for firm performance:
EM 3 = Accrual cash flow from operating .
The larger EM3 are indicative of large-scale
use of discretion to manipulate reported
accounting earnings.
Our fourth EM measure, AEM, is the
average ranking of the above three earning
management measures. Following the concept
of Leuz et al. (2003), we ranked firms’ EM1,
EM2 and EM3 and calculated their averages,
that is, for firm i,
AEM = (Rank ( EM1) + Rank ( EM 2)
+ Rank ( EM 3)) 3.
Note that Rank (EM1) and Rank (EM2) are
reversed to be consistent with Rank (EM3).
Hence, the higher the AEM, the more is the
tendency to earnings management.
Data of CLSA
The CLSA report includes corporate governance (CG) rankings on 495 companies in 25
emerging countries in April 2001 and February
2002.2 In these reports, firms’ corporate governance was assessed based on seven key criteria. The reports show that good corporate
governance is associated with strong performance in several dimensions, including
share price level, stock returns and accounting
profitability.
The questions in the CLSA report cover
seven broad categories: management discipline (DISC), transparency (TRAN), independence (INDP), accountability (ACCT),
responsibility (RESP), fairness (FAIR) and
social awareness (SOCI). The meanings of
these categories are as follows. “Transparency” refers to the ability of outsiders to assess
the true position of a company. “Discipline”
refers to management’s commitment to
emphasise shareholder value and financial
discipline. “Independence” refers to the
board of director’s independence of controlling shareholders and senior management.
“Accountability” refers to the accountability
of management to the board of directors.
“Responsibility” refers to the effectiveness of
the board to take necessary measures in case
of mismanagement. “Fairness” refers to the
treatment minority shareholders receive from
majority shareholders and management. The
last category, “social awareness”, refers to the
company’s emphasis on ethical and socially
responsible behaviour.
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Furthermore, CLSA included CG6, the
simple average of the first six items and CG7,
the weighted average of the seven items, with
the weight being equal to 15 per cent for the
first six items and 10 per cent for the last one.
In our case, only nine Asian countries
were adopted, including Hong Kong, India,
Indonesia, Korea, Malaysia, the Philippines,
Singapore, Taiwan and Thailand. We skipped
the remaining countries since the identification of the firms in CLSA could not be positively confirmed.3
Earning management and
governance
Econometric model
The determinants in our earnings management
equation consider the firm-level corporate
governance variables (CG6 or CG7), as well as
the financial ratios of firms. In addition to
these two types of variables, the interactions of
both variables are also attempted to investigate
the robustness of the two types of variables.
Following the suggestions of Richardson et al.
(2002), our model is
EMi = β0 + β1(CG6 or CG7 )i + β2 Size
+ β3 Leverage + β4 External
+ β5 EPS_Grow + β6 Earnings_Yield
+ β7 PGDP + β8 Antidirect + β9 LAW
(1)
+ β10 Disclosure + β11 Insider
β j = β0 + β1(CG6 or CG7 ) j ;
j = 2, 3, 4 , 5, 6;
(2)
where subscript i is the ith firm, EM is
proxied by EM1, EM2, EM3 and AEM,
respectively; Size is the log of firm’s sales,
Leverage is the debt ratio (total debt/total
asset), External is the amount of external
financing, EPS_Grow is the number of growth
in EPS in the recent three years and Earnings_Yield is the earnings to stock price. We used
the Worldscope database (2000), which contains
up to 10 years (1991–2000) of historical financial data from home-country annual reports
of publicly-traded companies around the
world, to calculate all EM measures and
financial variables above. To compute these
variables we require that each firm have
income statement and balance sheet information for at least three consecutive years.
PGDP is a 6-year average (1994–1999) of the
GDP per capita. Antidirect is the “antidirector rights” index from La Porta et al.
(1998), and an aggregate measure of (minority) shareholder rights, ranging from zero to
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six. LAW is measured as the mean score
across three legal variables used in La Porta et
al. (1998): (a) the efficiency of the judicial
system, (b) an assessment of rule of law and
(c) the corruption index. All three variables
range from zero to 10. Disclosure measures
the inclusion or omission of 90 items in the
1990 annual reports (La Porta et al., 1998).
Insider is the 5-year average (1997–2001) of
the insider trading index taken from the
World Competitiveness Yearbook (2002). Insider
ranges from zero to 10, and the higher the
variable, the less the extent of inside trading.
The relation between firm size (Size) and
earnings management is controversial. One
view is that capital market pressures are
greater for larger firms because they are
subject to closer scrutiny by the investment
banks and analyst community, leading them to
adopt aggressive accounting policies. Therefore, larger firms have higher incentives to
manage earnings (Richardson et al., 2002),
which is referred to as the size effect in this
paper. The opposite view is that large firms are
often requested to disclose their information
and hence have less probability to manage
earnings. Insiders of small firms, alternatively,
are able to retain their private information
more successfully than their counterparts of
large companies, suggesting a reverse size effect
(Lee and Choi, 2002). Hence, the coefficient on
Size is uncertain.
Leverage is used to capture the impact of
debt contracting on earnings management.
Two opposite empirical evidences are found
between the leverage and earnings management. One strand of evidence is that high
leverage firms tend to manage earnings
aggressively, which is dubbed as the leverage
effect. This is suggested by Sweeney (1994)
and Press and Weintrop (1990), who found
that firms closer to violating debt covenants
manage earnings more aggressively and that
highly leveraged firms tend to violate debt
covenants. Becker et al. (1998) support this
view and found that managers respond to
debt contracting by strategically reporting
discretionary accruals. Richardson et al. (2002)
presented the evidence that debt covenants
(as proxied by leverage) are a motivation for
aggressive accounting policies of restatement
firms. Opposite to the above view, high leverage may also imply less earnings management, which is dubbed as the reverse leverage
effect. Dechow and Skinner (2000) reported
that firms with high leverage are less likely to
report small increases in earnings. Ke (2001)
found that the probability of reporting a
small increase in earnings rather than a small
decrease in earnings is higher for firms with
low financial leverage. Chung and Kallapur
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
(2003) did not find evidence of a statistically significant association between abnormal
accruals and leverage. As a result, the relation
between Leverage and EM is uncertain.
External is the average ratio of the amount of
external financing relative to total assets.
Firms, which raise external funds from capital
market, tend to portray a rosy picture of
future potential. Hence, firms with high external funds will actively engage in earnings
management (Richardson et al., 2002), which
is referred to as the external financing effect. On
the contrary, firms with higher external funds
will engage in less earnings management,
since they are under closer scrutiny by the
market and thus find it harder to fool the
market by manipulating earnings, which is
referred to as reverse external financing effect.
EPS_Grow is the number of years of consecutive growth of earnings to price (EPS)
(Richardson et al., 2002). In particular, it is
equal to 1, 2 or 3 if it has consecutive positive
growth for 1, 2 or 3 years. A higher number of
EPS_Grow has two implications. First, firms
indeed perform well, making its earnings
grow every year. Second, the strong performance is the result of earnings management
because firms face pressure from capital
markets to report growing earnings. Barth et
al. (1999) found that the market reacts negatively to firms that break their string of consecutive earnings increases. To avoid this
negative response, a firm with a decline in EPS
will have more incentive for earnings management, suggesting coefficient on EPS_Grow is
positively related to earnings management.
Earnings_Yield, which denotes the earning
yield, or earnings-to-price ratio, is used to
examine the market’s perceptions of future
growth. Prior research suggests that growth
stock is particularly sensitive to stock price,
especially around earnings announcements
(Skinner and Sloan, 2002). Richardson et al.
(2002) also expect that firms trading at low
earnings yield will be under greater pressure
to adopt aggressive accounting policies to
deliver the anticipated growth in earnings.
Hence, growth stock seems more likely to
adopt earnings management. This paper’s
intent is not to distinguish growth from value
stocks but rather simply to argue that growth
firms, proxied by low Earnings_Yield, are
more likely to engage in earnings management. Thus, Earnings_Yield is expected to be
negatively related to the extent to which firms
manage earnings.
The country-level governance variables are
also taken into account. Antidirect is the measure of protection of small shareholders, LAW
is the efficiency and integrity of the legal environment, which also includes corruption and
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
1003
enforcement, Disclosure is the transparency of
the financial reports and accounting standard,
Insider discusses the severity of insider
trading, and the higher Insider is indicative of
less severity of insider trading.
Equation (2) specifies the coefficient bj as the
function of corporate governance. The model
suggests that good governance may lessen the
incentive of earnings management triggered
by the above financial ratios.
Empirical evidence
Data description and basic statistics
Table 1 reports the basic statistics of EM1,
EM2, EM3 and AEM. In addition to the
country column, the first column is the
number of firms used in each country. India
has the highest number of firms of 48, and
Philippines has the lowest number of firms of
8. The total number of firms used is 203, but
this number varies across the years because of
missing data in some firms. The highest mean
of EM1 falls on Taiwan (0.467), followed by
India (0.457) and Hong Kong (0.420). Recall
that the higher the EM1, the lesser is the
earnings smoothing. Hence, on average, these
three countries show the lowest tendency to
adopt earnings smoothing. In addition, while
Taiwan has the lowest tendency to smooth
earnings, its variation is also the largest. In
contrast to the above three countries, Thailand
has the lowest mean of 0.218 with the least
variation of 0.153.
EM2 shows similar patterns as those of EM1
in that the above three countries (Taiwan,
Hong Kong and India) still exhibit the highest
numbers. Among these three countries, however, Hong Kong, rather than Taiwan, has
the highest mean with the highest standard
deviation. Because both EM1 and EM2 are
designated to detect earnings smoothing, the
earnings smoothing is thus less severe. This is
probably because there are many tax deduction mechanisms in these countries to encourage investment and free trade.4
EM3, which measures earnings aggressiveness, shows a different result. The highest
number still falls on Hong Kong (2.291), but
the meaning of earnings management is reversed. Recall that EM3 is employed to detect
the proportion of accruals to cash flow, and
hence a higher EM3 implies a stronger tendency to conceal the true earnings by using
the accruals. This evidence, together with the
above results of EM1 and EM2, suggest that
the earnings management in Taiwan seems to
focus on adjusting income level (based on
EM3), but this adjustment is not related to
earnings smoothing (based on EM1 and EM2).
Volume 15
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CORPORATE GOVERNANCE
Volume 15
Number 5
September 2007
EM1, EM2, EM3 and AEM are the earning management measures defined in this paper. Following Leuz et al. (2003), EM1 and EM2 are measure earnings smoothing, and EM3
measure earnings aggressiveness. The higher EM1 (and EM2) implies firms are less prone to conduct earnings smoothing, and the higher EM3 implies firms are more prone to
conduct earnings aggressiveness. AEM is simply the average of the rankings of EM1, EM2 and EM3 for each firm. The higher AEM implies firms have higher extent of earnings
management. CG6 and CG7 are the average of corporate governance index in CLSA (2002). The higher CG6 (and CG7) represents better corporate governance.
63.10
62.39
36.84
58.87
61.82
52.88
63.12
60.69
62.63
59.32
62.81
61.36
36.84
57.48
61.34
51.25
63.29
59.91
62.37
59.92
27.667
15.000
31.333
78.000
29.000
25.000
24.000
22.000
79.333
15.000
150.33
177.00
185.00
188.00
185.67
157.33
191.67
175.33
189.33
191.667
38.231
45.237
54.398
33.374
44.505
42.458
47.901
38.391
35.378
44.150
86.524
100.799
109.714
120.600
97.101
97.458
104.262
87.460
131.044
102.000
0.247
0.183
0.213
0.514
0.102
0.175
0.126
0.223
0.066
0.066
1.546
4.343
0.810
11.381
5.422
1.034
2.400
37.370
12.577
37.370
0.307
0.601
0.214
2.816
0.935
0.302
0.600
8.048
3.119
2.872
1.058
0.655
0.650
0.849
0.697
0.600
0.768
2.291
1.549
0.998
-1.000
-1.000
-1.000
-1.000
-1.000
-1.000
-1.000
-1.000
-1.000
-1.000
0.447
0.463
0.202
0.078
0.268
0.080
0.193
0.327
0.060
0.322
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Total
21
48
14
15
33
8
28
21
15
204
0.420
0.457
0.258
0.333
0.333
0.374
0.353
0.467
0.218
0.376
0.268
0.397
0.173
0.292
0.260
0.243
0.260
0.474
0.153
0.321
1.148
2.027
0.587
1.163
1.026
0.803
1.085
2.111
0.617
2.111
0.073
0.042
0.037
0.065
0.009
0.107
0.083
0.075
0.049
0.009
-0.743
-0.796
-0.856
-0.904
-0.841
-0.911
-0.846
-0.786
-0.961
-0.833
1.000
1.000
-0.429
-0.771
0.371
-0.800
-0.400
0.200
-0.800
1.000
Mean
Mean
Min
Max
SD
N
Mean
SD
Max
Min
Mean
Max
Min
Mean
SD
EM3
EM2
EM1
Country
Table 1: Descriptive statistics of earnings measures (EM1, EM2, EM3, AEM) and CG of firms across countries
Mean
SD
AEM
Max
Min
CG6
CG7
1004
This evidence is in fact consistent with the
finding of Bhattacharya et al. (2003), who
found that firms in Taiwan are actively engaged in earnings aggressiveness and loss
avoidance but passively in earnings smoothing. Thailand and Hong Kong have the second
and the third highest numbers of EM3. By contrast, the Philippines and Indonesia have the
lowest number of 0.600 and 0.650. Thailand,
Taiwan and Hong Kong have the highest
market capitalisation ratios in the region, and
this simple ranking appears to suggest that the
EM3 is positively related to the development
of capital market.
The AEM, adopted from Leuz et al. (2003), is
the ranking of earnings management. Hong
Kong and Taiwan have the lowest number
of 86.54 and 87.46, respectively, whereas
Thailand and Korea have the highest number
of 131.04 and 120.60, respectively. Hence,
in general, the former two countries manipulate less of the earnings than the latter two
countries.
The corporate governance measures of CG6
and CG7 provided by CLSA are also interesting. Indonesia has the lowest CG6 (36.84), followed by the Philippines (51.25) and Korea
(57.48), whereas Singapore has the highest
CG6 (63.29), followed by Hong Kong (62.81)
and Thailand (62.37). Thus, the ranking of CG6
seems to not be completely related to the above
earnings measurement measures. The ranking
of CG7 is similar to that of CG6 and hence is
skipped here.
Table 2 reports the descriptive statistics of
explanatory variables used in our sample. It
is surprising to find that the mean of Size
and External are similar across nine countries.
Consistent with our expectation, the highest
number of debt is in Korea (53.12) since
Korean firms borrowed substantially during
the Asian financial crisis; in contrast, the lowest number is in Hong Kong (18.95). Earnings
yield (Earnings_Yield) also differs across countries. Hong Kong is 9.29 per cent but Korea is
only -5.01 per cent.
Table 3 presents the correlation coefficients
of all variables used in this paper. Except for
the high correlation of up to 0.747 between
LAW and Disclosure, the correlation coefficients between other pairwise explanatory variables are less than 0.3. Interesting to note is
that Insider has a negative relation with CG6
and CG7. That is, the less insider trading of a
country, the lower is the corporate governance.
Recall that the higher the Insider, the less the
extent of inside trading. Therefore, the negative association between Insider and CG seems
to represent that the demand for sound corporate governance declines when insider trading
of a country is not severe.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
1005
Table 2: Descriptive statistics of firm characteristics across countries
Country
N
Size
Leverage
External
EPS_Grow
Earnings_Yield
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
21
48
14
15
33
8
28
21
15
13.64
12.73
13.19
15.11
13.19
13.37
13.17
13.27
12.47
18.95
22.16
39.67
53.12
21.56
31.09
22.13
23.26
39.02
0.03
0.04
0.06
0.12
0.03
0.07
0.04
0.08
0.10
0.38
0.42
0.00
0.13
0.03
0.13
0.11
0.29
0.13
9.29
5.94
-2.47
-5.01
4.46
3.02
2.72
4.39
2.28
13.35
13.19
30.11
23.26
0.06
0.06
0.18
0.13
2.74
3.02
Mean
Median
Size is the log of firm’s sales, Leverage is the debt ratio (total debt/total asset), External is the amount of
external financing, EPS_Grow is the number of growth in EPS in the recent three years and Earning_Yield is
the earnings to stock price. We used the Worldscope database (2000), which contains up to ten years (1991–
2000) of historical financial data from home-country annual reports of publicly-traded companies around the
world, to calculate the financial variables above. To compute these variables, we require that each firm have
income statement and balance sheet information for at least three consecutive years.
Regression results
Figure 1 plots the scatter plot between governance factors (CG6 and CG7) against four
earnings measures. The pattern is unclear for
these two variables because of strong heteroscedasticity. We adopted the weighted least
square (WLS) method by employing dependent variables as the weights to remove the
heteroscedasticity.5
Tables 4 to 7 report the estimated results of
models (1) and (2) using EM1, EM2, EM3 and
AEM as dependent variables, respectively.
There are four different specifications in each
CG, and the specifications depend on whether
interaction terms are taken into account or not
and hence eight equations are considered in
each table.
Table 4 presents the estimated results using
EM1 as the proxy of earnings management.
Coefficients of CG6 and CG7 are found to be
positively significant, indicating that good corporate governance increases EM1. Recall that a
higher EM1 denotes less earnings management, and hence good governance decreases
the earnings smoothness, which is consistent
with our intuition.
We next discuss the influences of the
financial variables and how CG6 affects the
impacts of these financial variables. Coefficients of Size are overwhelmingly negative,
suggesting that larger firms tend to do more
earnings smoothing. Hence, the size effect is
supported, and as noted above, this is consistent with Richardson et al. (2002).6 Coefficients of the interaction between Size and
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
CG6, however, are insignificant, suggesting
that the good governance does not mitigate
the earnings smoothing when the size of firm
is large. Coefficients of Leverage are mostly
insignificant except for specification (C). In
specification (C), coefficient of Leverage is
significantly positive (which is 0.026), but its
interaction term with CG6 is significantly
negative (which is -0.0004). Thus, the turning
point of Leverage is decided by the formula
0.026 - 0.0004 ¥ CG6, which is equal to 65.
When CG6 is higher than this turning point,
leverage effect exists, i.e. highly leveraged
firms conduct more earnings smoothing.
When CG6 is lower than this turning point,
reverse leverage effect exists, i.e. highly leveraged firms conduct less earnings smoothing.
It represents that a highly leveraged firm
with poor governance is prone to be scrutinised closely and thus harder to fool the
market by manipulating earnings.
External’s coefficients are significantly positive in the first two specifications, supporting the reverse external financing effect, i.e.
firms with higher external financing engage in
less earnings smoothing. In specification (C),
however, this effect disappears, as the coefficient of the interaction, CG ¥ External, is
significantly positive. EPS_Grow and Earnings
_Yield seem not to have a strong effect on EM1,
meaning that a firm with high earnings
growth and a high Earning level is not prone to
adopt earnings smoothing. Furthermore, coefficients of the interaction terms with CG,
CG ¥ Earning_Yield, are insignificant. In sum,
CG variables do have an effect on earnings
Volume 15
Number 5
September 2007
CORPORATE GOVERNANCE
EM1
EM2
EM3
DISC
TRAN
INDP
ACCT
RESP
FAIR
SOCI
Antidirect
LAW
Insider
Disclosure
CG7
Number 5
September 2007
EM1, EM2 and EM3 are the earning management measures defined in this paper. DISC, TRAN, INDP, ACCT, RESP, FAIR and SOCI are the average of corporate
governance index in CLSA (2002); CG6 is the simple average of the first six items, and CG7 is the weighted average of the seven items, with the weight = 15% for the first
six items and 25% for the last one. Antidirect is the “anti-director rights” index from La Porta et al. (1998), is an aggregate measure of (minority) shareholder rights, ranging
from zero to six. LAW is measured as the mean score across three legal variables used in La Porta et al. (1998): (a) the efficiency of the judicial system, (b) an assessment
of rule of law and (c) the corruption index. All three variables range from zero to 10. Disclosure measures the inclusion or omission of 90 items in the 1990 annual reports
(La Porta et al., 1998). Insider is the 5-year average (1997–2001) of the inside trading index taken from World Competitiveness Yearbook. Insider ranges from zero to 10, and
the higher the variable, the less the extent of inside trading.
0.102
0.004
0.040
0.626
0.361
0.668
0.509
0.582
0.606
0.509
0.243
0.321
-0.393
0.456
0.997
0.097
-0.001
0.038
0.620
0.363
0.685
0.500
0.605
0.628
0.443
0.247
0.337
-0.363
0.451
0.057
0.011
0.024
0.196
0.175
0.329
0.184
0.305
0.286
0.275
0.321
0.747
-0.392
-0.092
-0.022
-0.053
-0.261
-0.138
-0.093
-0.341
-0.081
-0.129
-0.526
-0.163
0.030
0.071
0.075
0.004
0.166
0.100
0.349
0.025
0.258
0.317
-0.029
0.439
0.150
0.086
-0.094
0.187
-0.234
0.308
0.054
0.144
0.303
0.073
0.102
0.066
0.039
0.363
0.148
0.130
0.346
0.016
0.037
0.071
-0.015
-0.007
0.311
0.046
0.403
0.068
0.354
-0.066
-0.033
-0.042
0.231
0.112
0.392
0.141
0.024
-0.018
0.042
0.167
0.139
0.169
0.123
-0.034
-0.014
0.283
0.041
0.120
0.036
0.065
Volume 15
0.205
-0.085
-0.057
-0.004
0.029
0.097
0.101
INDP
TRAN
DISC
EM3
EM2
Table 3: EM, corporate governance and investor protection
ACCT
RESP
FAIR
SOCI
Antidirect
LAW
Insider
Disclosure
CG7
CG6
1006
management. Moreover, it affects the manner
that financial ratios influence earnings
management.
Coefficients of macro and country-level
governance variables are also interesting.
GDP per capita has a positive effect on EM1
regardless of specifications. Accordingly,
wealthy countries have less intention to adopt
earnings smoothing, representing the effect
of better accounting/reporting standards in
more developed countries (LLSV, 1998). With
regard to the country governance, coefficients of Antidirect are significantly positive in
specification (B), suggesting that a firm in a
country with good anti-director rights does
less earnings smoothing, which is consistent
with Leuz et al. (2003). Contrary to those
found in Leuz et al. (2003), however, stronger
anti-director rights show counter-intuitive
result as it causes stronger earnings smoothing. This is because the same coefficient
changes the sign to negative (-0.466) in specification (D), but this effect appears in low
firm-level governance countries only, and not
in high firm-level governance countries,
because the coefficient of the interaction term,
CG ¥ Antidirect, is positive (0.009). Law and
Disclosure do not have strong impact on EM.
Insider has a negative effect (-0.466) on EM1
in specification (D), while the coefficient of
the interaction term, CG ¥ Insider, is positive
(0.006), representing that good firm-level
governance more effectively decreases earnings smoothing in countries with less inside
trading.
Similar results are obtained when CG7 is
used and hence are not discussed here.
Table 5 presents the estimated results using
EM2 as a dependent variable. Recall that a
higher EM2 implies it is less likely that accruals
to offset economic shocks will be employed,
and hence less earnings smoothing. Coefficients of CG6 and CG7 are found to be
overwhelmingly positive regardless of specifications, suggesting that firms with weak governance are prone to use accruals to conduct
earnings smoothing. These results are the
same as those found in Table 4.
Coefficients of corporate controllable variables in Table 5 also demonstrate similar patterns as those reported in Table 4. Namely,
Size, which also has a negative sign, implying
size effect, but this effect is elusive as it is only
significant in the first specification. The results
of Leverage are similar to those reported in
Table 4. There is a turning point for the external
financing effect on EM2. That is, in the specification (C), the coefficient of External is
-12.509, and the coefficient of interaction,
CG ¥ External, is 0.199, making the turning
point of CG6 to be around 63.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
1007
Figure 1: Scatter plot of corporate governance (CG) and EM
The coefficients of EPS_Grow are positive
in specification (A) and (B) in Table 5, representing firms with higher EPS_Grow, to avoid
negative response by the market, have higher
incentives to manage earnings to maintain
their string of consecutive earnings increases,
which is consistent with Barth et al. (1999).
However, high EPS_Grow with high CG
tends to encourage the earnings smoothing
as the coefficient of the interaction term,
CG ¥ EPS_Grow, is significantly positive in
specification (C). The coefficient of Earnings is
positive (0.047) in specification (C), while that
of the interaction term, CG ¥ Earning_Yield,
is negative (-0.001), suggesting that firms
with higher growth (lower earnings yield) is
prone to manage earnings (Skinner and Sloan
2002), especially when they have worse
governance.
The results of Antidirect are similar to those
shown in Table 4. It is seen that stronger
enforcement of laws (LAW) can result in less
earnings smoothing, since the coefficient is
positive (0.616) in specification (D). Interestingly, this effect is stronger in countries with
worse corporate governance, since the coefficient of the interaction term, CG ¥ LAW, is
negative (-0.009).
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
Coefficients of determinants in Table 5 are
higher than those in Table 4, suggesting a
better fitting. This is also evidenced by finding
more significant coefficients in Table 5. Especially, when the interaction terms are considered, the adjusted-R2 increases from 0.5 to 0.7
roughly.
Table 6 reports the estimation results using
EM3 as a dependent variable. Recall that a
large number of EM3 refers to strong earnings aggressiveness. Hence, negative coefficients on CG6 and CG7 imply that better
governance lessens the effect of earnings
management. Three differences are found in
this table from the previous two tables. First,
there is a leverage effect in EM3, i.e. highly
leveraged firms tend to conduct more earnings aggressiveness, but there is no reverse
leverage effect, which is found in EM1 and
EM2. Second, Size and External coefficients
are insignificant for all specifications, suggesting that neither large firms, nor firms that
rely on external finances are factors that affect the decision of earnings aggressiveness.
Hence, there is a size effect for earnings
smoothing but there is no size effect for earnings aggressiveness. Similarly, there is an
external financing effect for earnings smoothing
Volume 15
Number 5
September 2007
CORPORATE GOVERNANCE
1008
Table 4: EM1 prediction function: weighted least square
CG6
Constant
CG
Size
Leverage
External
EPS_Growth
Earnings_Yield
CG7
(A)
EM1
(B)
EM1
(C)
EM1
(D)
EM1
(E)
EM1
(F)
EM1
(G)
EM1
(H)
EM1
0.515
(1.592)
0.007***
(2.622)
-0.044**
(-2.050)
-0.001
(-0.640)
0.665*
(1.688)
0.095*
(1.657)
-0.003
(-1.218)
0.089
(0.157)
0.008***
(2.951)
-0.046*
(-1.953)
0.0004
(0.285)
0.958**
(2.247)
-0.002
(-0.032)
-0.001
(-0.432)
0.014
(1.460)
0.155***
(3.087)
-0.111
(-1.517)
0.005
(0.469)
0.002
(0.035)
0.829***
(2.999)
0.548
(1.009)
0.562
(1.031)
-0.041*
(-1.816)
0.001
(0.658)
0.619
(1.484)
-0.076
(-1.192)
0.001
(0.259)
0.017*
(1.903)
-0.466***
(-3.040)
0.224
(1.078)
0.031
(1.277)
-0.466**
(-2.295)
0.095
(0.166)
0.008***
(3.030)
-0.047**
(-1.990)
0.0004
(0.277)
0.939**
(2.200)
0.006
(0.096)
-0.001
(-0.482)
0.014
(1.462)
0.158***
(3.087)
-0.119
(-1.560)
0.006
(0.494)
0.003
(0.056)
0.855***
(3.075)
-0.074**
(-2.051)
0.026***
(2.450)
-3.929
(-1.512)
-0.643
(-1.577)
0.025
(1.230)
1.566*
(1.674)
0.006***
(2.585)
-0.045**
(-2.091)
-0.001
(-0.654)
0.671*
(1.695)
0.107*
(1.882)
-0.004
(-1.322)
-0.076**
(-2.132)
0.025***
(2.421)
-3.260
(-1.294)
-0.729*
(-1.811)
0.024
(1.223)
-0.042*
(-1.866)
0.001
(0.704)
0.573
(1.371)
-0.072
(-1.121)
0.001
(0.260)
0.017*
(1.906)
-0.460***
(-3.037)
0.200
(0.960)
0.036
(1.457)
-0.510***
(-2.557)
PGDP
Antidirect
LAW
Disclosure
Insider
CG ¥ Size
0.001
(1.553)
-0.0004***
(-2.550)
0.064*
(1.685)
0.010*
(1.730)
-0.0004
(-1.437)
CG ¥ Leverage
CG ¥ External
CG ¥ EPS_Growth
CG ¥ Earnings_Yield
CG ¥ Antidirect
0.009***
(4.220)
-0.005*
(-1.738)
-0.0003
(-1.107)
0.006**
(2.259)
CG ¥ LAW
CG ¥ Disclosure
CG ¥ Insider
R2
Adjusted R2
N
0.001
(1.589)
-0.0004***
(-2.518)
0.054
(1.459)
0.011**
(1.995)
-0.0004
(-1.441)
0.398
0.379
202
0.442
0.407
188
0.456
0.427
202
0.499
0.458
188
0.009***
(4.265)
-0.005
(-1.639)
-0.0004
(-1.290)
0.007***
(2.537)
0.406
0.388
202
0.451
0.417
188
0.464
0.436
202
0.510
0.471
188
***, ** and * represent the level of significance at 0.01, 0.05 and 0.10, respectively.
Volume 15
Number 5
September 2007
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
1009
Table 5: EM2 prediction function: weighted least square
CG6
Constant
CG
Size
Leverage
External
EPS_Growth
Earnings_Yield
CG7
(A)
EM2
(B)
EM2
(C)
EM2
-0.955***
(-2.719)
0.011***
(4.011)
-0.049**
(-2.120)
-0.003*
(-1.826)
1.405***
(3.280)
0.250***
(4.035)
-0.005
(-1.518)
-1.084*
(-1.720)
0.012***
(4.294)
-0.033
(-1.284)
-0.002
(-1.190)
1.781***
(3.786)
0.164***
(2.317)
-0.003
(-0.977)
-0.008
(-0.750)
0.071
(1.278)
0.007
(0.084)
-0.012
(-0.935)
0.076
(1.456)
-0.594***
(-2.528)
-0.495
(-0.894)
-0.039
(-1.255)
0.038***
(4.124)
-12.509***
(-5.664)
-1.558***
(-4.493)
0.047***
(2.765)
-0.021
(-0.911)
-0.001
(-0.815)
1.173***
(2.758)
0.033
(0.502)
-0.001
(-0.329)
-0.002
(-0.233)
-0.986***
(-6.317)
0.616***
(2.912)
-0.012
(-0.500)
-0.092
(-0.446)
PGDP
Antidirect
LAW
Disclosure
Insider
CG ¥ Size
(E)
EM2
(F)
EM2
(G)
EM2
-0.945***
(-2.684)
0.011***
(4.115)
-0.050**
(-2.164)
-0.003*
(-1.829)
1.459***
(3.397)
0.264***
(4.281)
-0.005
(-1.594)
-1.040*
(-1.649)
0.013***
(4.502)
-0.034
(-1.333)
-0.002
(-1.183)
1.800***
(3.837)
0.167***
(2.365)
-0.003
(-1.015)
-0.007
(-0.702)
0.075
(1.328)
0.002
(0.022)
-0.012
(-0.956)
0.077
(1.466)
-0.568***
(-2.392)
-0.401
(-0.727)
-0.046
(-1.512)
0.038***
(4.263)
-11.634***
(-5.413)
-1.579***
(-4.597)
0.044***
(2.636)
-0.024
(-1.040)
-0.001
(-0.737)
1.116***
(2.636)
0.029
(0.450)
-0.001
(-0.354)
-0.002
(-0.169)
-0.987***
(-6.434)
0.608***
(2.885)
-0.012
(-0.470)
-0.111
(-0.552)
0.0003
(0.910)
-0.001***
(-4.450)
0.199***
(6.104)
0.024***
(4.991)
-0.001***
(-3.152)
CG ¥ Leverage
CG ¥ External
CG ¥ EPS_Growth
CG ¥ Earnings_Yield
CG ¥ Antidirect
CG ¥ Disclosure
CG ¥ Insider
0.513
0.498
202
0.511
0.480
188
0.730
0.716
202
(H)
EM2
0.0004
(1.165)
-0.001***
(-4.589)
0.187***
(5.864)
0.025***
(5.122)
-0.001***
(-3.028)
0.016***
(7.109)
-0.009***
(-3.129)
0.0001
(0.229)
0.002
(0.647)
CG ¥ LAW
R2
Adjusted R2
N
(D)
EM2
0.625
0.595
188
0.016***
(7.292)
-0.009***
(-3.119)
0.0001
(0.169)
0.002
(0.771)
0.529
0.514
202
0.532
0.503
188
0.737
0.723
202
0.646
0.617
188
***, ** and * represent the level of significance at 0.01, 0.05 and 0.10, respectively.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
Volume 15
Number 5
September 2007
CORPORATE GOVERNANCE
1010
Table 6: EM3 prediction function: weighted least square
CG6
Constant
CG
Size
Leverage
External
EPS_Growth
Earnings_Yield
CG7
(A)
EM3
(B)
EM3
(C)
EM3
0.937***
(2.688)
-0.006**
(-2.119)
0.002
(0.088)
0.003*
(1.951)
0.122
(0.288)
0.058
(0.947)
-0.010***
(-3.183)
1.754***
(2.741)
-0.006*
(-1.945)
-0.005
(-0.200)
0.003*
(1.822)
0.242
(0.516)
0.067
(0.951)
-0.008***
(-2.467)
-0.020**
(-1.995)
-0.094*
(-1.692)
0.128
(1.590)
-0.027**
(-2.151)
0.164***
(3.108)
0.493
(1.634)
1.320**
(2.050)
0.057
(1.426)
-0.015
(-1.301)
-1.507
(-0.531)
-0.195
(-0.437)
0.053***
(2.411)
-0.006
(-0.209)
0.003*
(1.866)
0.191
(0.395)
0.060
(0.813)
-0.008**
(-2.295)
-0.021**
(-1.988)
-0.152
(-0.847)
0.018
(0.073)
-0.015
(-0.514)
0.295
(1.254)
PGDP
Antidirect
LAW
Disclosure
Insider
CG ¥ Size
(E)
EM3
(F)
EM3
(G)
EM3
(H)
EM3
0.993***
(2.795)
-0.006***
(-2.333)
0.001
(0.038)
0.003*
(1.842)
0.152
(0.349)
0.058
(0.928)
-0.010***
(-3.276)
1.800***
(2.757)
-0.006**
(-2.199)
-0.005
(-0.190)
0.003*
(1.709)
0.290
(0.608)
0.071
(0.990)
-0.008***
(-2.548)
-0.021**
(-2.007)
-0.098*
(-1.710)
0.137
(1.609)
-0.028**
(-2.089)
0.164***
(3.047)
0.515*
(1.673)
1.320**
(2.008)
0.054
(1.364)
-0.014
(-1.192)
-1.623
(-0.582)
-0.114
(-0.254)
0.054***
(2.496)
-0.005
(-0.201)
0.003*
(1.739)
0.233
(0.473)
0.064
(0.853)
-0.008***
(-2.410)
-0.022**
(-2.020)
-0.146
(-0.807)
0.033
(0.133)
-0.018
(-0.613)
0.330
(1.400)
-0.001*
(-1.696)
0.0003
(1.531)
0.028
(0.662)
0.003
(0.551)
-0.001***
(-2.893)
CG ¥ Leverage
CG ¥ External
CG ¥ EPS_Growth
CG ¥ Earnings_Yield
CG ¥ Antidirect
-0.001*
(-1.690)
0.0002
(1.405)
0.030
(0.734)
0.002
(0.356)
-0.001***
(-3.001)
0.001
(0.355)
0.002
(0.483)
-0.0001
(-0.490)
-0.002
(-0.582)
CG ¥ LAW
CG ¥ Disclosure
CG ¥ Insider
R2
Adjusted R2
N
(D)
EM3
0.357
0.337
196
0.353
0.311
182
0.412
0.380
196
0.357
0.303
182
0.001
(0.290)
0.002
(0.446)
-0.0002
(-0.371)
-0.002
(-0.730)
0.358
0.338
196
0.356
0.314
182
0.414
0.383
196
0.361
0.307
182
***, ** and * represent the level of significance at 0.01, 0.05 and 0.10, respectively.
Volume 15
Number 5
September 2007
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
but no such effect for earnings aggressiveness. Third, consistent with our intuition, the
results of Earnings_Yield suggest that a firm
with higher growth (lower earnings yield) is
more active in managing earnings, but good
governance can mitigate the effect. This
finding is similar to that in earnings
smoothing (EM2).
Third, most of the country-level indices,
including PGDP, Antidirect and Disclosure, are
significant. Hence, firms in countries with
good economic development and country
governance engage in less earnings aggressiveness, which is consistent with Leuz et al.
(2003).
Coefficients of determinants are smaller
than those of the previous two tables, being
consistent with the finding that most coefficients are insignificant.
Table 7 shows the estimated results of using
AEM. Recall that AEM is the average of the
rankings of EM1, EM2 and EM3 for each firm.
The higher AEM implies firms have higher
extent of earnings management. The coefficients of CG6 and CG7 are both significantly
negative, implying that better governance is
consistent with lower earnings management,
on average. It is also worth to noting that
coefficients of Size are positive in specification
(C) and (G), suggesting that larger firms tend
to do more earnings management. Coefficients
of the interaction between Size and CG6,
however, are significantly negative, suggesting that the good governance can mitigate the
earnings management, on average. As other
results do not change qualitatively, we skip the
discussion.
Robustness check
We examine whether a firm belonging to a
business group affects our results or not. This is
because a firm belonging to a business group
could have more channels to hide or increase its
costs or revenues.7 Thus, it gets more chance to
manage earnings. We obtain the information of
a firm belonging (or not belonging to) business
groups by first visiting the websites of our
sample firms. It is easy if the websites explicitly
and clearly record which group(s) a firm
belongs to. When the statement is ambiguous,
however, we key in the names of firms in
Google and Yahoo! to examine any relevant
news to obtain the information of belonging (or
not belonging).8 Table A2 shows our classification of belonging to a business group.
Tables 8 and 9 report the descriptive statistics for earnings management measures and
corporate governance indices of firms belonging to (and not belonging to) a business group.
It is shown that all paired mean differences in
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
1011
Tables 8 and 9 are statistically insignificant,
showing that whether a firm belongs to a business group does not greatly affect earnings management or corporate governance.
Table 10 shows that firms have higher earnings
growth and higher earnings yield if they do
not belong to business groups.
Tables 11 reports the estimated results by
adding a group dummy variable, which is
equal to 1 if a firm belongs to a business group
and 0 otherwise, when the earnings management is proxied by AEM. Table 12 addresses
the issue of endogenous earnings yield (Earnings_Yield) where the instruments are all other
explanatory variables (except for earnings
yield), including group dummy variable and
country-level governance indices as instruments. Again, the earnings management is
proxied by AEM.9 Results of Tables 11 and 12
are similar as those obtained from Table 7. Our
findings are, therefore, robust to the consideration of business groups and the endogeneity
of the earnings yield. More importantly, the
coefficients of group dummy variables are
overwhelmingly insignificant, indicating that
whether firms belong to a business group does
not affect the extent of earnings management,
at least in our sample firms.
Conclusion
This paper studies the impacts of corporate
governance on earnings management. The
index of corporate governance was taken from
Credit Lyonnais Security Asia, who study
firms in nine Asian countries. The measures
of earnings management include earnings
smoothing and earnings aggressiveness defined by Leuz et al. (2003) and Bhattacharya et
al. (2003). Our conclusion is as follows.
First, corporate governance indices are
found to be negatively related to the extent to
which firms manage earnings. That is, firms
with good corporate governance tend to
conduct less earnings management. Second,
there is a size effect for earnings smoothing,
that is, large firms are prone to conduct earnings smoothing. It is worth noting that this
effect or other types of size effect do not exist
for the management of earnings aggressiveness, but good corporate governance indices
seem to mitigate the size effect, on average.
Third, there is a turning point for leverage
effect, i.e. when corporate governance index is
higher than 60–70, leverage effect exists, otherwise, reverse leverage effect exists. Namely,
higher leveraged firms conduct earnings
smoothing more in a good governance regime
but less in weak governance regime. It represents that a highly leveraged firm with poor
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CORPORATE GOVERNANCE
1012
Table 7: AEM prediction function: weighted least square
CG6
Constant
CG
Size
Leverage
External
EPS_Growth
Earnings_Yield
CG7
(A)
AEM
(B)
AEM
(C)
AEM
(D)
AEM
(E)
AEM
(F)
AEM
160.249***
(3.851)
-1.073***
(-3.324)
0.362
(0.132)
0.291
(1.588)
10.325
(0.204)
-8.393
(-1.143)
0.243
(0.677)
344.404***
(4.624)
-1.048***
(-3.126)
-0.012
(-0.004)
0.139
(0.700)
-35.203
(-0.633)
-6.672
(-0.798)
0.135
(0.357)
-2.820***
(-2.332)
-23.392***
(-3.582)
22.044**
(2.302)
-3.930***
(-2.617)
12.366**
(2.004)
88.259***
(2.416)
274.296***
(3.763)
11.190***
(2.343)
-3.470***
(-2.452)
-74.108
(-0.216)
53.561
(0.994)
-2.682
(-1.013)
-0.588
(-0.192)
0.101
(0.514)
-8.522
(-0.152)
-0.319
(-0.037)
0.011
(0.029)
-3.126***
(-2.622)
26.574
(1.294)
-22.780
(-0.818)
-4.172
(-1.275)
58.975**
(2.164)
163.465***
(3.885)
-1.130***
(-3.544)
0.420
(0.152)
0.272
(1.492)
14.915
(0.291)
-9.522
(-1.291)
0.231
(0.639)
352.474***
(4.675)
-1.121***
(-3.367)
0.003
(0.001)
0.125
(0.632)
-28.736
(-0.512)
-7.362
(-0.871)
0.115
(0.300)
-2.943***
(-2.355)
-24.242***
(-3.610)
23.478***
(2.343)
-4.081***
(-2.613)
12.679**
(2.024)
PGDP
Antidirect
LAW
Disclosure
Insider
CG ¥ Size
-0.158***
(-3.108)
0.054***
(2.667)
1.629
(0.322)
-0.843
(-1.124)
0.043
(1.108)
CG ¥ Leverage
CG ¥ External
CG ¥ EPS_Growth
CG ¥ Earnings_Yield
CG ¥ Antidirect
84.785**
(2.292)
11.759***
(2.497)
-3.416***
(-2.454)
-167.983
(-0.501)
65.326
(1.220)
-2.315
(-0.882)
CG ¥ Disclosure
CG ¥ Insider
0.463
0.446
202
0.455
0.421
188
0.488
0.461
202
(H)
AEM
277.629***
(3.765)
-0.518
(-0.169)
0.076
(0.388)
1.228
(0.022)
-0.576
(-0.067)
-0.033
(-0.086)
-3.278***
(-2.665)
27.375
(1.335)
-17.794
(-0.631)
-4.919
(-1.474)
62.425**
(2.312)
-0.162***
(-3.296)
0.053***
(2.650)
3.182
(0.641)
-1.033
(-1.379)
0.037
(0.964)
-0.725***
(-2.520)
0.655*
(1.724)
0.002
(0.039)
-0.633*
(-1.694)
CG ¥ LAW
R2
Adjusted R2
N
(G)
AEM
0.483
0.441
188
-0.757***
(-2.624)
0.609
(1.566)
0.010
(0.232)
-0.676*
(-1.831)
0.470
0.454
202
0.466
0.432
188
0.497
0.470
202
0.495
0.454
188
***, ** and * represent the level of significance at 0.01, 0.05 and 0.10, respectively.
Volume 15
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September 2007
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Journal compilation © Blackwell Publishing Ltd. 2007
49
136
0.359
0.382
Mean
Min
0.262
0.049
0.310
0.009
-0.498
SD
EM1
1.376
2.027
Max
-0.881
-0.826
Mean
Min
0.199
-1.000
0.323
-1.000
-1.377
SD
EM2
0.000
1.000
Max
1.030
0.687
Mean
Min
1.800
0.126
0.682
0.066
1.300
SD
EM3
12.577
5.422
Max
108.136
98.549
Mean
Min
40.080
22.667
44.634
15.000
1.392
SD
AEM
188.000
191.667
Max
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
49
136
60.701
59.093
Mean
9.188
12.881
SD
0.938
CG6
32.429
17.771
Min
79.743
85.829
Max
60.024
58.561
Mean
9.367
13.008
SD
0.840
CG7
32.400
16.995
Min
79.600
86.800
Max
Volume 15
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49
136
13.054
13.309
Mean
Min
1.454 9.263
1.264 10.885
-1.089
SD
Size
16.269
16.447
Max
25.611
27.230
Mean
Min
19.318 0.000
20.377 0.000
-0.496
SD
Leverage
70.801
73.350
Max
0.042
0.052
Mean
Min
0.075 -0.137
0.070 -0.059
-0.865
SD
External
0.262
0.571
Max
1.939
1.316
Mean
Min
1.088 0.000
1.191 0.000
3.348***
SD
EPS_Grow
3.000
3.000
Max
6.211
2.636
Mean
Min
7.968 -32.887
11.810 -62.618
2.333***
SD
Earnings_Yield
32.200
21.852
Max
Group = 0 means firms do not belong to certain business group; Group = 1 means firms belong to certain business group. Size is the log of firm’s sales, Leverage is the debt ratio (total debt/total
asset), External is the amount of external financing, EPS_Grow is the number of growth in EPS in the recent three years and Earnings_Yield is the earnings to stock price. We used the Worldscope
database (2000), which contains up to ten years (1991–2000) of historical financial data from home-country annual reports of publicly-traded companies around the world, to calculate the
financial variables above. To compute these variables, we require that each firm have income statement and balance sheet information for at least three consecutive years.
Group = 0
Group = 1
t–test of
the diff.
Group (0
minus 1)
N
Table 10: Descriptive statistics of firm characteristics of firms not belonging to business group (group = 0) and firms belonging to business group (group = 1)
Group = 0 means firms do not belong to certain business group; Group = 1 means firms belong to certain business group. CG6 and CG7 are the average of corporate governance index in CLSA
(2002). CG6 and CG7 are the average of corporate governance index in CLSA (2002). The higher CG6 (and CG7) represents better corporate governance.
Group = 0
Group = 1
t–test of the diff.
Group (0 minus 1)
N
Table 9: Descriptive Statistics of corporate governance measures (CG6 and CG7) of firms not belonging to business group (group = 0) and firms belonging to business
group (group = 1)
Group = 0 means firms do not belong to certain business group; Group = 1 means firms belong to certain business group. EM1, EM2, EM3 and AEM are the earning management measures
defined in this paper. Following Leuz et al. (2003), EM1 and EM2 are to measure earnings smoothing, and EM3 is to measure earnings aggressiveness. The higher EM1 (and EM2) implies firms
are less prone to conduct earnings smoothing, and the higher EM3 implies firms are more prone to conduct earnings aggressiveness. AEM is simply the average of the rankings of EM1, EM2
and EM3 for each firm. The higher AEM implies firms have higher extent of earnings management.
Group = 0
Group = 1
t–test of the
diff. Group
(0 minus 1)
N
Table 8: Descriptive statistics of earnings measures (EM1, EM2, EM3, and AEM) of firms not belonging to business group (group = 0) and firms belonging to business
group (group = 1)
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
1013
September 2007
CORPORATE GOVERNANCE
1014
Table 11: AEM prediction function: business group effect
CG6
Constant
CG
Group
Size
Leverage
External
EPS_Growth
Earnings_Yield
CG7
(A)
AEM
(B)
AEM
(C)
AEM
(D)
AEM
(E)
AEM
(F)
AEM
(G)
AEM
(H)
AEM
187.231***
(4.228)
-0.773**
(-1.981)
-9.231
(-1.178)
-2.814
(-0.996)
0.239
(1.294)
38.111
(0.644)
-2.651
(-0.341)
0.153
(0.429)
321.683***
(4.202)
-0.788*
(-1.848)
-7.277
(-0.863)
-1.573
(-0.500)
0.123
(0.608)
14.526
(0.230)
-1.059
(-0.120)
0.119
(0.314)
-0.004***
(-2.828)
-19.055***
(-2.833)
20.844**
(2.205)
-4.003***
(-2.636)
18.988**
(2.542)
133.556***
(3.453)
278.885***
(3.526)
192.962***
(4.306)
-0.864**
(-2.246)
-9.136
(-1.155)
-2.778
(-0.971)
0.225
(1.217)
43.184
(0.717)
-3.661
(-0.464)
0.140
(0.390)
332.732***
(4.289)
-0.912**
(-2.139)
-7.315
(-0.859)
-1.571
(-0.498)
0.110
(0.546)
21.914
(0.343)
-1.765
(-0.198)
0.109
(0.286)
-0.004***
(-2.854)
-19.742***
(-2.851)
22.115**
(2.231)
-4.156***
(-2.627)
19.637**
(2.597)
122.276***
(3.032)
282.274***
(3.513)
PGDP
Antidirect
LAW
Disclosure
Insider
CG ¥ Size
-11.998
(-1.536)
9.959**
(2.070)
-2.424
(-1.529)
-685.482
(-1.510)
-68.191
(-1.051)
-2.325
(-0.864)
-0.180***
(-3.469)
0.038*
(1.655)
11.048
(1.594)
0.948
(1.028)
0.034
(0.878)
CG ¥ Leverage
CG ¥ External
CG ¥ EPS_Growth
CG ¥ Earnings_Yield
CG ¥ Antidirect
-67.914
(-1.060)
14.662**
(2.133)
-2.494
(-1.595)
-756.742*
(-1.728)
-68.345
(-1.034)
-2.089
(-0.782)
CG ¥ Disclosure
CG ¥ Insider
0.475
0.454
185
0.462
0.420
170
0.501
0.469
185
-6.724
(-0.788)
-1.729
(-0.544)
0.098
(0.485)
11.570
(0.179)
-1.528
(-0.170)
0.002
(0.005)
-0.003***
(-2.678)
0.208
(0.007)
-10.861
(-0.302)
-4.862
(-1.439)
72.004**
(2.182)
-0.237***
(-2.952)
0.038*
(1.692)
12.397*
(1.846)
0.947
(1.001)
0.030
(0.777)
-0.278
(-0.608)
0.568
(1.142)
0.002
(0.054)
-0.789
(-1.642)
CG ¥ LAW
R2
Adjusted R2
N
-6.678
(-0.790)
-1.811
(-0.571)
0.117
(0.578)
3.342
(0.052)
-1.091
(-0.123)
0.032
(0.081)
-0.003***
(-2.613)
-0.657
(-0.021)
-18.040
(-0.511)
-4.222
(-1.272)
72.549**
(2.171)
0.474
0.423
170
0.306
(0.509)
0.487
(0.950)
0.009
(0.200)
-0.769
(-1.624)
0.480
0.460
185
0.471
0.431
170
0.511
0.477
185
0.484
0.433
170
***, ** and * represent the level of significance at 0.01, 0.05 and 0.10, respectively.
Volume 15
Number 5
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EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
1015
Table 12: AEM prediction function: instrumental variable methods
CG6
Constant
CG
Size
Leverage
External
EPS_Growth
Earnings_Yield
(A)
AEM
(B)
AEM
161.592***
(3.890)
-1.291***
(-2.651)
0.355
(0.129)
0.406
(1.605)
77.555
(0.605)
-10.069
(-1.367)
1.782
(0.645)
363.269***
(3.751)
-1.209**
(-2.210)
-0.120
(-0.039)
0.137
(0.652)
-12.066
(-0.082)
-6.257
(-0.692)
1.204
(0.401)
-0.003*
(-1.838)
-26.266**
(-2.449)
23.417**
(1.987)
-4.271**
(-2.112)
15.458
(1.351)
PGDP
Antidirect
LAW
Disclosure
Insider
CG ¥ Size
CG7
(C)
AEM
87.691**
(2.402)
11.551**
(2.420)
-3.501**
(-2.488)
-102.477
(-0.297)
50.848
(0.943)
-3.068
(-1.161)
(E)
AEM
(F)
AEM
(G)
AEM
(H)
AEM
273.359***
(3.580)
185.888***
(4.213)
-1.297**
(-2.529)
-2.332
(-0.828)
0.385
(1.551)
164.825
(1.162)
-5.181
(-0.667)
2.923
(1.037)
377.709***
(3.670)
-1.272*
(-1.818)
-1.661
(-0.513)
0.081
(0.362)
118.605
(0.771)
-0.942
(-0.089)
2.354
(0.768)
-0.005***
(-2.584)
-25.756**
(-2.304)
25.096**
(2.318)
-5.039***
(-2.592)
25.871**
(2.083)
112.967***
(2.991)
307.679***
(3.696)
-0.470
(-0.147)
0.093
(0.464)
-23.690
(-0.207)
-0.846
(-0.101)
-0.315
(-0.137)
-0.003**
(-2.187)
-22.681
(-0.416)
-22.681
(-0.814)
-4.727
(-1.027)
62.042*
(1.801)
-0.162***
(-3.197)
0.054***
(2.705)
1.998
(0.393)
-0.800
(-1.065)
0.047
(1.261)
CG ¥ Leverage
CG ¥ External
CG ¥ EPS_Growth
CG ¥ Earnings_Yield
CG ¥ Antidirect
10.873**
(2.288)
-2.184
(-1.409)
-758.361*
(-1.727)
46.177
(0.717)
-1.738
(-0.643)
CG ¥ Disclosure
CG ¥ Insider
0.461
0.444
185
0.455
0.421
170
0.489
0.463
185
-2.502
(-0.728)
0.112
(0.548)
103.922
(0.682)
-2.084
(-0.238)
2.142
(-0.719)
-0.005**
(-2.382)
-48.980
(-0.656)
2.664
(0.065)
-1.873
(-0.345)
48.652
(1.043)
-0.181***
(-3.600)
0.034
(1.504)
12.324*
(1.832)
0.645
(0.699)
0.026
(0.669)
-0.805
(-1.229)
0.651*
(1.722)
0.012
(0.151)
-0.695
(-1.188)
CG ¥ LAW
R2
Adjusted R2
N
(D)
AEM
0.482
0.441
170
0.409
(0.371)
0.326
(0.576)
-0.056
(-0.575)
-0.265
(-0.312)
0.477
0.459
185
0.470
0.433
170
0.503
0.474
185
0.483
0.436
170
***, ** and * represent the level of significance at 0.01, 0.05 and 0.10, respectively.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
Volume 15
Number 5
September 2007
CORPORATE GOVERNANCE
1016
governance is scrutinised closely by the
market and thus finds it harder to fool the
market by manipulating earnings.
Fourth, firms with higher growth (lower
earnings yield) tend more actively to engage in
earnings smoothing and earnings aggressiveness, but good corporate governance can mitigate the effect.
Finally, being consistent with the findings of
Leuz et al. (2003), a firm in a country with good
anti-director rights engages in less earnings
smoothing and earnings aggressiveness. Contrary to those found in Leuz et al. (2003), stronger anti-director rights may result in stronger
earnings smoothing. This effect, however,
appears in low firm-level governance countries only, and not in high firm-level governance countries. Stronger enforcement of
laws can result in less earnings smoothing,
which is also consistent with Leuz et al. (2003),
but this effect is stronger in countries with
worse corporate governance. Therefore, on
predicting earnings management across countries, in addition to country-level governance
(such as Leuz et al., 2003), the role of corporate
governance should have to be taken into
account.
Notes
1. Following Leuz et al. (2003), we did not consider
the effect of discretionary and non-discretionary
earnings management.
2. The report in April 2001 entitled “Saints and
Sinners: Who’s Got Religion?” and “Make me
Holy . . . but not yet!” in February 2002.
3. The names of the firms in CLSA were based on a
literal translation, which may not have matched
the actual names of the firms.
4. Taiwan provides tax deductions for high technology firms and other deemed crucial industries.
Hong Kong is a free trade harbour. India also
provides many tax deductions to encourage
investments. Hence, this may be the reason of
low smoothing management in the three
countries.
5. More specifically, we attempted different
weights, i.e. CG1, CG1.5 and CG2 in WLS.
Reported results are based on CG1.
6. If firm size can be used as a proxy for information asymmetry and earnings management is
measured by earnings smoothing, managers
may choose to smooth earnings to lower earnings volatility and, in so doing, convey more
valuable, more relevant information to uninformed investors (Fukui, 2000; Goel and
Thakor, 2003). Larger firms have, therefore,
higher incentives to engage in earnings
smoothing.
7. For example, Claessens and Fan (2002) interpret
that, in Asia, agency problems have been exacerbated by low corporate transparency, associated
with rent-seeking and relationship-based transactions, extensive group structures and diversifications, and risky financial structures.
8. We key in the names of firms as well as the key
words of subsidiary, consolidation and group in
Google and Yahoo! to examine any relevant
news.
9. Since the results are qualitatively the same if the
earnings management is proxied by EM1, EM2
or EM3, we present the results of AEM only.
Appendix
Table A1: CLSA corporate governance attributes
Governance attribute
CLSA explanation
Disclosure attribute
Transparency
(TRAN)
Volume 15
Number 5
September 2007
The ability of outsiders to assess the true position of a company
(1) Disclosure of financial targets (e.g. three- and five-year ROA/ROE)
(2) Timely release of Annual Report
(3) Timely release of semi–annual financial announcements
(4) Timely release of quarterly results
(5) Prompt disclosure of results with no leakage ahead of announcement
(6) Clear and informative results disclosure
(7) Accounts presented according to IGAAP
(8) Prompt disclosure of market-sensitive information
(9) Accessibility of investors to senior management
(10) Website where announcements are updated promptly
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
1017
Table A1: Continued
Governance attribute
CLSA explanation
Non-disclosure attribute
Discipline
(DISC)
Public commitment to CG and financial discipline
(1) Explicit public statement placing priority on CG
(2) Management incentivised toward a higher share price
(3) Sticking to clearly defined core business
(4) Having an appropriate estimate of cost of equity
(5) Having an appropriate estimate of cost of capital
(6) Conservation in issuance of equity or dilative instruments
(7) Ensuring debt is manageable, used only for projects with adequate
returns
(8) Returning excess cash to shareholders
(9) Discussion in Annual Report on CG
Independence
(INDP)
Board is independent of controlling shareholders and is separate from
senior management
(1) Board and senior management treatment of shareholders
(2) Chairman who is independent from management
(3) Executive management committee comprised differently from the board
(4) Audit committee chaired by independent director
(5) Remuneration committee chaired by independent director
(6) Nominating committee chaired by independent director
(7) External auditors unrelated to the company
(8) No representatives of banks or other large creditors on the board
Accountability
(ACCT)
Proper accountability of management to the Board
(1) Board plays a supervisory rather than executive role
(2) Non-executive directors demonstrably independent
(3) Independent, non-executive directors constitute at least half of the
board
(4) Foreign nationals presence on the board
(5) Full board meetings at least every quarter
(6) Board members able to exercise effective scrutiny
(7) Audit committee that nominates and reviews work of external auditors
(8) Audit committee that supervises internal audit and accounting
procedures
Responsibility
(RESP)
Record of taking measures in case of mismanagement:
(1) Acting effectively against individuals who have transgressed
(2) Record of taking measures in cases of mismanagement
(3) Measures to protect minority interests
(4) Mechanisms to allow punishment of executive/management committee
(5) Share trading by board members fair and fully transparent
(6) Board small enough to be efficient and effective
Fairness
(FAIR)
Treatment of minorities:
(1) Majority shareholders treatment of minority shareholders
(2) All equity holders having right to call general meeting
(3) Voting methods easily accessible (e.g. through proxy voting Quality of
information provided for general meetings)
(4) Guiding market expectations on fundamentals
(5) Issuance of ADRs or placement of shares fair to all shareholders
(6) Controlling shareholder group owning less than 40% of company
(7) Portfolio investors owning at least 20% of voting shares
(8) Priority given to investor relations
(9) Total board remuneration rising no faster than net profits
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
Volume 15
Number 5
September 2007
CORPORATE GOVERNANCE
1018
Table A1: Continued
Governance attribute
CLSA explanation
Other attribute
Social Awareness
(SOCL)
Labour and environmental issues:
(1) Explicit policy emphasising strict ethical behaviour
(2) Not employing the under-aged
(3) Explicit equal employment policy
(4) Adherence to specified industry guidelines on sourcing of materials
(5) Explicit policy on environmental responsibility
(6) Abstaining from countries where leaders lack legitimacy (e.g.
Myanmar)
Table A2: Classifications of belonging to a business group
No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
Country
Hong
Hong
Hong
Hong
Hong
Hong
Hong
Hong
Hong
Hong
Hong
Hong
Hong
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
Volume 15
Kong
Kong
Kong
Kong
Kong
Kong
Kong
Kong
Kong
Kong
Kong
Kong
Kong
Firm name
Group
No.
Country
Firm name
Group
Li & Fung
Cathay Pacific
Swire
HK Electric
Kingboard Chemical
Esprit Holdings
SmarTone
New World Dev
Hutchison Whamoa
Texwinca Holdings
ASM Pacific
Yue Yuen
South China Morning Post
Dr
Castrol
Cipla
Hero
BPCL
Asian
Hindalco
ITC
Colgate-Palmolive
ABB
Nestle
Tata
Cummins
Ranbaxy
NIIT
Siemens India
Grasim Industries
VSNL
Reliance Indystries
Bajaj Auto
Tata Tea
Britannia Industries
IOC
ONGC
Tata Infotech
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
India
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Indonesia
Korea
Korea
Korea
Korea
Korea
Korea
Korea
Korea
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Pfizer India
Unilever
Ramayana
Telkom
Sari Husada
Bimantara Citra
Astra Int’l
Semen Gresik
Gudang Garam
HM Sampoerna
Tempo Scan
Indofood
Matahari
Indah Kiat
Indocement
Daelim Ind
LG Chenical
Hyundai Motor
SK Telecom
Kia Motors
SK Corp
LG Electronics
Samsung Heavy Industry
BAT
Tanjong
Road Builder
Carlsberg
UMW
IOI Corp
EON
Gamuda
Malakoff
IJM
MISC
Tan Chong
Sime Darby
Pgas
JTI
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Number 5
September 2007
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
1019
Table A2: Continued
No.
Country
Firm name
Group
No.
Country
Firm name
Group
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
Malaysia
Malaysia
Malaysia
Malaysia
Indonesia
Indonesia
Indonesia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
Philippines
Philippines
Philippines
Philippines
Philippines
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Singapore
Taiwan
Taiwan
Taiwan
Taiwan
Taiwan
Taiwan
Thailand
Thailand
Thailand
Thailand
Guinness
Resorts
Telekom Malaysia
Genting
Matahari
Indah Kiat
Indocement
YTL Power
MPI
Golden Hope
K. Guthrie
Tenaga
TRI
MAS
Magnum
B Toto
PLDT
Globe
ABS-CBN
Manila Electric Co
San Miguel Corp
SPH
ST Egg
SC Logistics
SC Marine
NOL
Keppel Land
City Dev
Cerebos
Venture
Natsteel Ltd
Keppel Corp
Creative
A-P Breweries
SingTel
Delgro
Haw Par Corp
Wing Tai
Cycle & Carriage
Robinson
Singland
Parkway
Datacraft
F&N
UOL
China Steel
Delta
China Airlines
Nan Ya Plastics
Formosa Plastics
Hon Hai
Thai Union Frozen
Siam City Cement
Siam Cement
BEC World
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
Thailand
Thailand
Thailand
Thailand
Thailand
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
India
Korea
Korea
Korea
Korea
Korea
Malaysia
Malaysia
Philippines
Philippines
Philippines
Singapore
Singapore
Singapore
Singapore
Taiwan
Taiwan
Taiwan
Taiwan
Thailand
Thailand
Thailand
Thailand
Thailand
Thailand
Siam Makro
Elect’y Geneat’g
PTTEP
United Broadcast
Telecom Asia
CLP
MTRC
Giordano
HK&China Gas
Techtronic Inds
Johnson Electric
First Pacific Company
Television Broadcasts
Hindustan
BSES
Cadbury
Punjab
Glaxo
TISCO
HPCL
L&T
BHEL
IPCL
Nalco
Zee Telefilms
Satyam Computers
MTNL
Novartis India
Wockhardt
M&M
Kepco
Hite Brewery
Cheil Jedang
Posco
Shinsegae Dept Store
Nestle
Star
Jollibee Foods Corp
Petron Corp
Ayala Corp
Sing Airlines
Marco Polo
FCC
Want Wanr
SPIL
Compeq
Giant
Nien Hsing
Adv Info Service
Tot’l Access Com
Delta Elec Thai
Bangkok Bank
Land&Houses (F)
Bangkok Exp’way
1
1
1
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
Volume 15
Number 5
September 2007
CORPORATE GOVERNANCE
1020
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Chung-Hua Shen is currently a professor in
the Department of Money and Banking in
National ChengChi University, Taiwan. He
received his PhD from Washington University
in the USA. He teaches financial market and
financial institutions, global financial systems
and corporate governance. He was the Fulbright scholar in 2000 and Eisenhower Fellower in 2006. He has published papers in
Journal of Banking and Finance, Journal of Money,
Banking and Credit, Journal of Econometrics,
Journal of International Money and Finance, International Journal of Economics and Finance,
Review of Quantitative Finance and Accounting,
Southern Economic Journal, Journal Policy Modeling, Eastern Economic Journal, Journal of Macroeconomics, Pacific Basin Finance Journal,
Journal of Business and Economics, International
Economic Journal, Applied Economics, Applied
Financial Economics and International Journal for
Forecasting.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN ASIA’S EMERGING MARKETS
Hsiang-Lin Chih is currently an associate professor and the director in Department of Cooperative Economics at the College of Business,
National Taipei University, Taiwan. He teaches
corporate finance, financial institutions man-
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
1021
agement, cooperative economics, nonprofit
financial management, and corporate social
responsibility. He has published papers in
Academia Economic Papers, Journal of Business
Ethics and Journal of Banking and Finance.
Volume 15
Number 5
September 2007