Online published on 28 February, 2020.
According to a United Nations report, Bangladesh will be the third fastest-growing economy in the world in 2019. When the economic growth of a country flourishes, undesired consequences such as corruption, favouritism and inequality tend to increase if they remain unchecked. It can inhibit the development of the country. Bangladesh is no exception to this. In order to sustain the high level of growth, Bangladesh is in need of proper governance and accountability systems. At micro level, management (agent) of a firm may try to maximize their own benefits at the costof owners (Principal), which creates agency problems (agency problem 1). In Bangladesh, concentrated ownership is very high and hence controlling owners may expropriate the interest of minority shareholder (agency problem 2). In both the cases, they apply earnings management techniques to disguise other actions to other parties. So, it is necessary to delve deep into earnings management practices.
At the beginning of last decade, presence of widespread corruption induced different stakeholders to raise their voice for regulations which mayensure transparency and accountability. In corporate arenas, due to severe agency problems, minority shareholders are being deprived from their rights. In 2012, Bangladesh Securities and Exchange Commission (BSEC) issued its-revised Corporate Governance Guidelines, which sought to improve corporate governance practices as well as enhance financial
reporting quality through restraining earnings management practices. My aim was to examine the impact of corporate governance (CG) practices in reducing real earnings management. I address four related questions: (1) How does board composition influence real earnings management practices of firm's managers? (2) What is the relationship between ownership structure and real earnings management? (3) How audit quality is associated with real earnings management? (4) Do corporate governance guidelines restraint manager(s) from practice of real earnings management?
I explore these four research questions in my study using a sample of listed Bangladeshi firms. I studied all firms listed on the Dhaka Stock Exchange (DSE) over eighteen year period (from 2000 to 2018) for which I obtained the data. Sample size of my study is 2195 firm year observations. Due to absence of electronic database of public listed companies, I used manual-input data in my study. The main sources of data are company annual report, prospectus, different public issue offer documents and monthly review of Dhaka Stock Exchange. A set of (N=26) hypotheses were established to canvas the primary research questions mentioned above. I selected panel data analysis for this study because of its ability to evidently distinct the effects of explicit actions and treatments both over time and across sections.
I find proportion of independent director, size of audit committee, presence of independent director on the audit committee, proportion of independent director on the audit committee, presence of CEO in audit committee, and presence of independent director in audit committee as a chairman are negatively associated with real earnings management. On the other hand, presence of family relationship among board member, proportion of family members on the board, presence of female director, proportion of female director, presence female independent director, proportion of female independent director, number of board meeting, and presence of CEO in audit committee as a chair are positively associatedwithreal earnings management. I also find board size, presence of independent director, presence of representative director, presence of CEO duality, presence of audit committee, family relationship in audit committee are not associated with real earnings management. Some of my results may be rather counterintuitive. For example, presence of independent director are not associated with real earnings management, but, proportion of independent director are negatively associated with real earnings management.
The research findings of my study will significantly contribute to the work of external agencies, such as IFAs. IFAs may evaluate their role in the development of regulatory and legal framework. They should not follow the practices of developed country, rather, they may consider respective countries socio-economic conditions. My findings may also assist different regulatory authorities such as the BSEC, DSE, in further improving CG practices in Bangladesh. Finally, The findings of the empirical study contributes to the literature by providing the empirical evidence of the relationship between real earningsmanagementand corporate governance of an emerging economy and maybe generalized in contextssimilarto Bangladesh in termsof inadequate investorprotectionand institutional weakness.
