| Pub. Date | : Jan, 2024 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP010124 |
| Author Name | : Prachi P Kolamker and Varsha B Ingalhalli |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 19 |
Corporate governance is a mechanism that safeguards the interests of shareholders. A well-structured corporate governance mechanism keeps a check on the earnings management practices that are detrimental to the interests of the shareholders. The paper evaluates to what extent corporate governance practices restrain the accrual-based earnings management practices and thereby enhance the value of the shareholders depicted through economic value addition (EVA). Independent variables considered are board structure, board size, presence of financial expertise, CEO duality, ownership structure, board activity, audit committee and board busyness. Modified Jones Model was used for calculating the earnings management of 87 nonfinancial Indian companies, and Dynamic Panel Regression technique was used to study the impact of corporate governance practices on financial performance. The Indian companies were found to be indulging in income-increasing and income-decreasing earnings management practices. The main parameters impacting the financial performance of the companies are role of directors and ownership structure. The study contributes to the existing literature in the Indian context, throwing light on the earnings management practices of companies. It is vital for the shareholders to understand how effective corporate governance will create value to the shareholders by reducing earnings management practices.
Earnings management takes place when managers of the company make use of their own judgment in reporting the earnings of the company, thereby altering the transactions to manipulate financial reports. The intention is to mislead the stakeholders about the undisclosed economic performance of the company or to influence the contractual aftermath that entirely relies on the reported financials of the company. Discretion is used by the managers to alter financial reports in their personal interest, thereby indirectly hampering the interests of the shareholders. Such strategies are used at the time of realization of gains or losses on investments, to emphasize reported earnings, meet earnings thresholds, declare performance-based incentives, or when the company is close to declaring dividends.