Choice of governance structure and earnings quality

Abstract

Purpose The purpose of this paper is to examine the effectiveness of voluntary governance mechanisms in Australia. Design/methodology/approach This study identifies similar choices of corporate governance by Australian firms and tests the effectiveness of the choices made based on the earnings quality of reported firms. Cluster analysis is conducted using governance best practice variables, firm size and an earnings quality variable. Findings This paper’s results support the voluntary governance approach for smaller firms, but suggest that mandatory governance requirements could be beneficial for larger firms. Evidence suggests that a benefit accrues for larger firms with the adoption of governance best practice. Cluster analysis indicates that larger firms tend to exhibit higher levels of adoption of governance best practice than smaller firms. Originality/value This paper adds to the literature by providing important information regarding the suitability of adoption of voluntary governance mechanisms in Australia.