Teset

Does Corporate Governance affect Earnings Quality: Evidence from an Emerging Market
Muhammad Nurul Houqe, Tony van Zijl, Keitha Dunstan, A.K.M. Waresul Karim ABSTRACT This study examines whether firm governance practices have an effect on accounting earnings quality in Bangladesh. Using a sample of 648 firm-year observations for the period of 2001 - 2006, the result suggests that corporate governance mechanisms provide greater monitoring of financial reporting and these mechanisms positively affect firm earnings quality. This knowledge could be used by the capital market regulator, the Securities and Exchange Commission (SEC), to design mechanisms to constrain managers‟ earnings management practices. This, in turn, would contribute towards development of an efficient stock market and thus protect investors‟ interests. Key word: earnings quality, discretionary accruals, corporate governance. JEL classification: J3; K2; M4. 1. INTRODUCTION This study examines whether firm governance practices have an effect on accounting earnings quality in Bangladesh. Extant research suggests that “a better-governed firm reduces control rights which stockholders‟ and creditors confer on managers, increasing the probability that managers invest in shareholders‟ value-creating projects” Shleifer and Vishny (1997:132). Bangladesh firms has not faced similar to those accounting scandals reported in larger economies such as the US, the UK, the Canada and Australia. Nevertheless, there is concern is poor earnings quality (Kabir et al. 2008, Habib and Islam 2007, and Habib 2005). During the period 1993 to 2000 six major developments took place in regards to corporate financial reporting in Bangladesh. First, the Securities and Exchange Commission (SEC) was established in 1993, under the SEC Act of 1993. Second, the Companies Act 1913 was replaced by the new Companies Act 1994 that came into force from October 1, 1995. Third, in October 1997 the SEC revised the Securities and Exchange...