Association Between Earnings Management and Corporate Governance Mechanisms: A Study Based on Select Firms in India

This article initially attempts to search for a robust model for the estimation of discretionary accruals (proxy for earnings management) of select manufacturing firms in India. The two models from extant literature considered to search for a better model are the modified Jones model put forth by Dechow, Sloan, and Sweeney (1995 , The Accounting Review, 70, 193–225) and the Kasznik (1999 , Journal of Accounting Research, 37, 57–81) model. Subsequently the study aims at appraising the linkage between various corporate governance mechanisms and earnings management using panel data regression and employing Fisher’s probability test. The study reveals strong negative association of earnings management with the percentage of independent directors on the board and with diligence of the board members. However, it fails to accept the conjecture that percentage of promoters on the board has a positive impact on earnings management. The assumption that audit committee size has a negative impact on earnings management could not be established too. Furthermore, the study fails to draw any concrete relationship between earnings management and other governance mechanisms considered, such as board size, frequency of board meetings, CEO duality, audit committee independence, frequency of audit committee meetings and auditing by Big-4 auditors.