Corporate Governance Mechanisms and Family Directives: Aggressive or Conservative in Earnings Management?

Mujeeb Saif Mohsen Al-Absy, Ku

Abstract

Earnings Management (EM) is one of the most important measurements of financial reporting quality which has increased the attention of scholars in recent time. The purpose of this paper is to investigate whether the interaction terms of family directors and Corporate Governance (CG) mechanisms is significantly associated with aggressive or conservative EM, by grouping EM into income-increasing (aggressive) and income-decreasing (conservative) EM. The final sample of the three-year period of 2013, 2014 and 2015 is 864 Malaysian firm-year observations. The findings provide evidence of the entrenchment effect of family directives on managerial decisions as proposed by the type II agency theory. Results show that firms which have engaged in aggressive EM, most of the CG mechanisms with family directors are significantly associated with high aggressive Discretionary Accruals (DA) and Abnormal Real Earnings Management (ABREM). However, in firms which have engaged in conservative EM, the influence of CG mechanisms with family directors shows mixed results on conservative DA, while most of CG mechanisms with family directors are significantly associated with less conservative ABREM. In general, CG mechanisms with family directors are significantly associated with more aggressive and less conservative EM. This study points to policymakers, firms and their stakeholders, as well as researchers to the need for more policies on having family directors on board which common practice in countries such as Malaysia.