The effect of corporate governance characteristics on real earnings management across Philippine publicly listed firms

• Main Authors: Caja, Ken Elfren A., Castillo, Angel Alyson C., Diaz, Kezia Abigail D., Mikoshiba, Naoki M.
• Format: text
• Language: English
• Published: Animo Repository 2023
• Subjects: Earnings management—Philippines; Corporate governance—Philippines
• Online Access: https://animorepository.dlsu.edu.ph/etdb_econ/59; https://animorepository.dlsu.edu.ph/context/etdb_econ/article/1070/viewcontent/The_effect_of_corporate_governance_characteristics_on_real_earnin.pdf
• Institution: De La Salle University

The practice of real earnings management has become more prevalent as it is less prone to regulatory scrutiny. However, much of the literature has focused on accrual-based earnings management in the context of developed countries. This study analyzes the impact of corporate governance characteristics on the level of real earnings management employed by firms in the Philippines. We use firm-year data on non-financial PSE-listed firms from 2010-2019 and alternative performance-matched real earnings management measures using abnormal cash flows, abnormal discretionary expenditures, abnormal production costs, and abnormal sales, general, and administrative expenses. Moreover, we use board size, board independence, board financial expertise, multiple directorships, managerial ownership board, and CEO duality to represent corporate governance characteristics. We then estimate our model using standard panel regression with lagged independent variables to account for potential endogeneity issues. Among the corporate governance characteristics, we find that only board independence shows a significant positive relationship with real earnings management through cash flow from operations when performance-matched real earnings management measures are used. However, we find that when the traditional or non-performance matched measures are used, all corporate governance characteristics significantly affects certain real earning management practices. The result that only board independence affects real earnings management after performance matching suggests that the impact of all other corporate governance characteristics on the traditional REM measures merely reflects a firm’s abnormal real activities that are a rational response to economic shocks to firm value. Overall, it appears that corporate governance mechanisms among Philippine publicly listed companies are still weak in mitigating real earnings management practices due to opportunistic managerial behaviors.