Impact of corporate governance practices on earnings management: a study of selected pharmaceutical companies

Corporate governance becomes an important issue after the 1997 – 1998 monetary crises thathit several countries in Southeast Asia, including India. A central issue affecting the quality of financial information disclosed is the extent to which managers manipulate reported earnings to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers. This paper examines the relationship between corporate governance on corporate financial performance when performance is stripped of the discretionary component of accruals. In order to achieve this objective, it is pertinent to link the explanatory variables to three dependent variables, i.e., earnings management (discretionary accruals i.e. ADA), reported financial performance (EBIT) and true financial performance (reported financial performance less discretionary accruals i.e. (EBIT-DA). The results shows that the corporate governance has significant impact on firm's performance as measured by financial performance measure EBIT, where as it doesn't have any significant impact on true financial performance and absolute discretionary accruals.