Corporate Governance and Earnings Management in Saudi Listed Firms

The system of corporate governance is designed for the effective and efficient operation of corporations on behalf of stakeholders as a mean of enabling various stakeholders to monitor managers effectively against opportunistic behavior. The corporate governance mechanisms have shown in other context of different organizations to affect firms' behavior particularly the earnings management practices. The issue has been tested worldwide and it was shown that earnings management could be affected by the structure of corporate governance of the firms. Therefore, this study aims to investigate the impact of corporate governance mechanisms (i.e. independent director, Board size, board meetings and audit committee characteristics) on earnings management activities in Saudi listed firms for the year 2008. The study is significant due to the lack of empirical studies in the field of corporate governance and earnings management since the Saudi code of corporate governance has been enacted in the late 2006. More interesting this study will be of significant since it tests the period following the financial crisis in order to show whether the earnings management activities have experienced a change during this period compares to the past period as well as whether the corporate governance enhance the earnings quality and help in curbing earnings management in such critical period. The results of the study show that earnings management activities do not experienced any change post enactment of corporate governance code for Saudi listed firms. Furthermore, the corporate governance mechanisms have shown to have no impact on earnings management except for the board meetings which show negative relationship with earnings management. The impactions of the study for regulations are to help them in assessing whether the corporate governance achieved its objectives in order for them to take the corrective actions wherever necessary