Abstract
Purpose – The paper seeks to examine the association between corporate governance mechanisms
and the quality of accounting earnings.
Design/methodology/approach – Quality of earnings is measured in two ways: the
accounting-based measure of earnings management and the market-based measure of earnings
informativeness. Using firm-level corporate governance data for a sample of Canadian firms in the
years 2001-2004, regression analysis explores the relation between corporate governance (including
board composition, management shareholding, shareholders’ rights and the extent of disclosure of
governance practices), and the quality of earnings.
Findings – Empirical tests demonstrate that overall governance quality is negatively related to the
level of abnormal accruals and positively influences the return-earnings association. In addition, the
magnitude of abnormal accruals is negatively associated with the level of independence of board
composition, the extent of alignment of management compensation with interests of shareholders and
the strength of shareholder rights. The results from the returns and earnings analysis are consistent
with these findings.
Research limitations/implications – The tests in this study are association tests. Future research
may use qualitative research approaches to examine the link between quality of financial reporting
and governance effectiveness.
Originality/value – This study provides evidence that supports Canadian regulators’ initiatives
that stronger corporate governance mechanisms provide greater monitoring of the financial
accounting process and may be important factors in improving the integrity of financial reporting.
Keywords Corporate governance, Accounting, Earnings
Paper type Research paper