Effect of audit committee independence, board ethnicity and family ownership on earnings management in Malaysia

Abstract

Purpose The purpose of this paper is to investigate the effect of audit committee independence, board ethnicity and family ownership on earnings management in Malaysia. Design/methodology/approach The effect of audit committee independence, board ethnicity and family ownership on corporate governance is investigated via 1,206 firm-year observations between the fiscal years of 2004 and 2009 of Bursa Malaysia listed firms. Panel data regression analysis is used to analyze the relationship. Findings The findings of this study fail to associate the role of audit committee independence as proposed under RMCCG (2007) in curtailing earnings management activities, thus supporting the findings on power distance scores that power granted to the top management may result in less effective independent directors. Nonetheless, in support of the alignment effect theory, family ownership is found to reduce earnings management activities. The findings show that corporate governance is more effective in developing country family firms due to their long history of family reputation and the importance of institutional culture factors. Research limitations/implications This study focuses on board ethnicity, family ownership and its influence on earnings management. Originality/value This study offers insights into the importance of family institutional structures on corporate governance reforms in Malaysia as Malaysian family firms are mostly traditional firms that have built their reputation and strength in the industry for many generations.