Corporate governance, corporate social responsibility and earnings management practices: evidence from Jordan

Corporate governance, corporate social responsibility and earnings management practices: evidence from Jordan

Earnings management has captured the attention of researchers, because accounting earnings are considered to be amongst the most important indicators of the financial performance of a company, and this subject remains a fruitful area for academic research. As a result of the practice of earnings management, financial crises may occur in companies, resulting in weakening reliability and doubtful fairness of published financial statements.

Previous studies have focused on earnings management and the factors that may affect earnings management practices. Likewise, the current study explores some of these factors, such as corporate governance and corporate social responsibility, and whether they affect earnings management practices in the financial reporting of industrial companies in the public sector in Jordan, during the period 2006-2015. This period includes 2 important events in the Jordanian context: The Corporate Governance Code, introduced in 2008/2009, and the global financial crisis in 2008. The current study has taken into consideration two periods: 2006-2008 (before the introduction of the Corporate Governance Code) and 2009-2015 (after the introduction of the Corporate Governance Code), to compare the results of this study, whilst other studies have considered only before or after the introduction of the Corporate Governance Code. Therefore, this study provides an analysis of the effectiveness of the code’s introduction.

The current study has examined corporate governance mechanisms (ownership structure and audit committees) as control tools to ensure a firm's performance effectiveness, and to provide a way to monitor the behaviour of the managers. Additionally, the current study has examined corporate social responsibility (CSR) and evaluated how it may be used as a mask to cover earnings management practices.

This study has used discretionary accruals, derived from the Modified Jones and Modified Jones with ROA models, as a proxy for measuring earnings management. An ordinary least square regression was used to investigate the association between corporate governance mechanisms, CSR, and earnings management. The data was collected from 49 Jordanian industrial companies listed on the Amman Stock Exchange (ASE), during the period 2006-2015.

The results have revealed that institutional ownership and earnings management were positively related at significant levels, whilst insider ownership has no effect on earnings management in the Jordanian industrial sector. CSR and earnings management were found to be negatively associated at significant levels. At the same time, audit committee and earnings management were negatively but insignificantly
related.

This study makes an important contribution to both the research literature and corporate governance practice. It facilitates discussion about the link between corporate governance mechanisms, CSR disclosures, and earnings management practices. Additionally, this research informs supervisory and regulatory authorities about the influence of corporate governance mechanisms, CSR disclosures and how they may be used to help avoid earnings management. This study assists the users or beneficiaries of financial reports to understand earnings management practices, and increase their awareness about this phenomenon.