Earnings quality and corporate governance following the implementation of Malaysian code of corporate governance

Wan Adibah Wan Ismail, Keitha Dunstan, Tony van Zijl

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Abstract

This paper investigates the association between corporate governance mechanisms and earnings quality after the implementation of the Malaysian Code of Corporate Governance in 2001. Using 1625 firm-year observations during the period 2003-2007, we tested whether corporate governance variables are significant determinants of earnings quality. We regressed eleven corporate governance variables on earnings quality proxies, which were estimated using the modified Jones (1991) and Kasnik (1999) models. We found that (1) size of the board of directors and (2) size of the audit committee, are positively associated with the level of earnings quality. This indicates that large boards of directors and audit committees are more effective in performing their governing roles than smaller boards and audit committees. However, while the monitoring effectiveness of audit committees is consistent throughout the sample, the effectiveness of board governance is limited to government-linked and state-owned companies. Our findings suggest that adopting the code without considering the local institutional framework may not be efficient. As this study was conducted on a large sample of firm's over a reasonable time-frame, the results capture a strong picture of the association between earnings quality and corporate governance in Malaysia.
Original languageEnglish
Title of host publicationProceedings of the Journal of Contemporary Accounting and Economics (JCAE) and Seoul National University joint symposium
Place of PublicationHong Kong
PublisherThe Hong Kong Polytechnic University
Pages1-40
Number of pages40
Publication statusPublished - 2010
EventJournal of Contemporary Accounting and Economics (JCAE) and Seoul National University (SNU) joint symposium - Hong Kong, Hong Kong
Duration: 4 Jan 20105 Jan 2010

Conference

ConferenceJournal of Contemporary Accounting and Economics (JCAE) and Seoul National University (SNU) joint symposium
Abbreviated titleJCAE/SNU
CountryHong Kong
CityHong Kong
Period4/01/105/01/10

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