The effectiveness of corporate governance on real earnings management in selected Malaysian companies

The practice of real earnings management occurs at companies where investors’ protection is high and stringent corporate governance measures are put to place. The study examines the relationship between corporate governance attributes and real earnings management. In this study real earnings management is measured using three proxies, abnormal discretionary expenses, abnormal production cost, and abnormal cash flow from operations. The corporate governance attributes examined are board structure characteristics and audit committee characteristics. The sample consist of top 100 companies rated high based on Malaysia Corporate Governance Index 2011 (MCG Index) on best practices of corporate governance. Financial companies are excluded resulted to a final sample of 78 companies. The relationships of board structure and audit committee are tested using Ordinary Least Square regression. The results reveal that certain corporate governance variables are effective in constraining real earnings management activities. The findings of the hypothesised variables, board structures and audit committee. The study find that only board size and directors expertise constrain earnings management, but none of the audit committee variables show significant relationship with real earnings management. It can be conclude that board size and directors expertise are constraining factors in constraining real earnings management. The finding of the study is important for market participant and policy makers in defining effective corporate governance mechanism that could address the issue of real earnings managemen