The Impact of Corporate Governance Variables on Earnings Management in India

Abstract

The dawn of 21st century has marked the plunge of numerous colossal enterprises across the continent that not only quivered the business environment of economies but also shackled the investor confidence. This phenomenon which has been the reason for these losses is termed as Earnings management. A series of amendments paving way for stringent law to ensure better transparency and accountability have been put into practice to restrain earnings management. In India, in the year 2006 major corporate governance reform was introduced by making revised Clause 49 of listing mandatory. The Clause has a set of mandatory
and non-mandatory guidelines. The present work has been taken to explore the relationship between the non-mandatory corporate governance variables as per revised Clause 49 (2006) variables and discretionary accrual a proxy of earnings management in Indian context. The study period is 2007-2014 and
a sample of 209 BSE listed companies has been taken. These corporate governance variables are handpicked from the annual reports of 209 companies. In total 1463 annual reports are scanned for the purpose of extracting variables of this study. The study revealed that non-mandatory variables such as
remuneration committee and independent directors along with control variables such as firm size are significant in reducing the instances of earnings management. The study fills the literature gap as empirical studies examining the relationship between earnings management and corporate governance in the Indian context are limited.