Corporate governance and earnings management: An Australian perspective

Abstract

This study examines the extent to which the first-time adoption of the Australian Stock Exchange (ASX) Corporate Governance Council?s corporate governance principles and recommendations was associated with lower levels of earnings management. Cross-sectional results indicate that the existence of an audit committee was associated with lower levels of earnings management in pre-, but not post-, recommendations. Lower director ownership was associated with higher levels of earnings management pre-, but not post-, recommendations. On the other hand, the existence of a remuneration committee was associated with lower levels of earnings management pre- and post-recommendations. In addition, longitudinal analysis shows that, following the first-time adoption, the only governance mechanism associated with reductions in earnings management was the establishment of a remuneration committee.