Corporate Governance and Earnings Management: Evidence from Listed Firms at Palestine Exchange

Abstract

The agency problem gives an incentive to present corporate governance codes that help reduce the conflict of interest between company owners and managers. This study used corporate governance indicators to assess the relationship between CG and earnings management. Managers use earnings management to overstate or understate the figures to serve their own interests. Data were collected for the 33 sampled companies in this study from the annual reports of the listed companies at the Palestine stock exchange. The modified cross-sectional Jones model was used to define the value of earnings management. The independent variables (CG indicators) were board independence, board size, ownership concentration, CEO duality, and audit quality. In addition, to control variables to account for differences in size and performance of the firm, these variables are company size, return on asset and leverage. By using the regression model, a significant correlation between EM and size for the year 2015 and between EM and ownership concentration, size and return on assets for the year 2016 were found. The overall regression result showed that the model fits with the variable used. The R-squared (coefficient of determination) values showed that approximately 65% and 73% of the variability of earnings management was accounted for by the variables in the model.