Relationship between Corporate Governance and Earnings Management

Abstract

This study aims to investigate the relationship between corporate governance dimensions and earnings management in Tehran Stock Eechange over 2002-2007. We have selected 40 companies as the research sample after applying samplying techniques and deleting some companies. The results of the mean difference test showed that discretionary accruals are lower for the firms that had good performance in the past regardless of whether the corporate governance levels were strong or weak .We also found that discretionary accruals are lower for such firms after controlling the strength of corporate governance. Furthermore, we found that firms with weak governance may not necessarily have low discretionary accruals compared to the firms with strong governance. On the whole, the results support the conclusion that it is the adequacy rather than the strength of corporate governance that is associated with discretionary accruals. Thus, the results show that the adequacy of corporcete governance has a significant correlation with earnings management.

Keywords

• strength of corporate governance
• adequacy of corporate govermance
• earings management