Corporate governance mechanisms, whistle-blowing policy and real earnings management

Abstract

The purpose of this study is to investigate whether the mechanisms of corporate governance (CG) in firms that have a policy of whistle-blowing (WBP) are more effective in mitigating real earnings management (REM) than those without WBP. To achieve this objective, a sample of 288 Malaysian firms for the years 2013 to 2015, have been grouped into firms with and without WBP. In addition, the Roychowdhury Models were used to determine the abnormal levels of the REM. The results show that most of the CG mechanisms, i.e., audit committee (AC) size, AC meetings, AC independence and auditor size in firms with WBP are found to be significantly associated with low level of REM, supporting agency and resource dependence theories. However, only board independence and ownership concentration are found to be significantly associated with high level of REM. Regarding firms without WBP, most of the CG mechanisms, i.e., AC size, women in the AC, AC accounting expertise and ownership concentration, are found to be significantly associated with a high level of REM. However, only board meetings, AC multiple directorships and auditor size are found to be significantly associated with low level of REM. The findings of this study suggest that having WBP in a firm could improve the monitoring role of the CG mechanisms towards mitigating REM. However, strengthening the role of WBP is still necessary to improve the efficiency of the monitoring role of CG mechanisms. Hence, there is a need for more policies that could encourage whistle-blowers to disclose any misconducts in firms and at the same time, prevent management from undermining the effectiveness of the whistle-blowing policy. The findings of this study will enrich the body of literature due to the absence of studies that examine the influence of WBP on REM.