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Earnings Management and Corporate Governance in Asia's Emerging Markets


  • Chung-Hua Shen

    (Department of Money and Banking in National ChengChi University, Taiwan)

  • Hsiang-Lin Chih


This paper studies the impacts of corporate governance on earnings management. We use firm-level governance data, taken from Credit Lyonnais Security Asia (CLSA), of nine Asian countries, in addition to the country-level governance data used in past studies. Our conclusion is as follows. First, firms with good corporate governance tend to conduct less earnings management. Second, there is a "size effect" for earnings smoothing, that is, large size firms are prone to conduct earnings smoothing, but good corporate governance can mitigate the effect on average. Third, there is a turning point for "leverage effect", i.e. when the governance index is large, "leverage effect" exists, otherwise "reverse leverage effect" exists. It shows that a highly leveraged firm with poor governance is prone to be scrutinised closely and thus finds it harder to fool the market by manipulating earnings. Fourth, firms with higher growth (lower earnings yield) are prone to engage in earnings smoothing and earnings aggressiveness, but good corporate governance can mitigate the effect. Finally, firms in stronger anti-director rights countries tend to exhibit stronger earnings smoothing. This counter-intuitive result is different from Leuz "et al". (2003). Copyright (c) 2007 The Authors; Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Chung-Hua Shen & Hsiang-Lin Chih, 2007. "Earnings Management and Corporate Governance in Asia's Emerging Markets," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(5), pages 999-1021, September.
  • Handle: RePEc:bla:corgov:v:15:y:2007:i:5:p:999-1021

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    References listed on IDEAS

    1. Luigi Zingales & Raghuram G. Rajan, 2003. "Banks and Markets: The Changing Character of European Finance," NBER Working Papers 9595, National Bureau of Economic Research, Inc.
    2. Barca, Fabrizio & Becht, Marco (ed.), 2002. "The Control of Corporate Europe," OUP Catalogue, Oxford University Press, number 9780199257539, June.
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    Cited by:

    1. Chung-Hua Shen & Kun-Li Lin, 2010. "The Impact of Corporate Governance on the Relationship Between Fundamental Information Analysis and Stock Returns," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(5), pages 90-105, September.
    2. Kamran & Attaullah Shah, 2014. "The Impact of Corporate Governance and Ownership Structure on Earnings Management Practices: Evidence from Listed Companies in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(2), pages 27-70, July-Dec.
    3. repec:eco:journ1:2017-02-78 is not listed on IDEAS
    4. Wu, Meng-Wen & Shen, Chung-Hua & Lu, Chin-Hwa, 2015. "Do more foreign strategic investors and more directors improve the earnings smoothing? The case of China," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 3-16.
    5. Lin, Fengyi & Wu, Sheng-Fu, 2014. "Comparison of cosmetic earnings management for the developed markets and emerging markets: Some empirical evidence from the United States and Taiwan," Economic Modelling, Elsevier, vol. 36(C), pages 466-473.
    6. Shan, Yuan George, 2015. "Value relevance, earnings management and corporate governance in China," Emerging Markets Review, Elsevier, vol. 23(C), pages 186-207.
    7. Chung-Hua Shen & Kun-Li Lin, 2010. "The Impact of Corporate Governance on the Relationship Between Fundamental Information Analysis and Stock Returns," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(5), pages 90-105, September.
    8. Hui-Wen Tang & Chong-Chuo Chang, 2015. "Does corporate governance affect the relationship between earnings management and firm performance? An endogenous switching regression model," Review of Quantitative Finance and Accounting, Springer, vol. 45(1), pages 33-58, July.
    9. Windsor, Duane, 2009. "Tightening corporate governance," Journal of International Management, Elsevier, vol. 15(3), pages 306-316, September.
    10. Hwang, Ruey-Ching, 2012. "A varying-coefficient default model," International Journal of Forecasting, Elsevier, vol. 28(3), pages 675-688.

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