Corporate Governance Mechanisms and Earnings Management Activities: Evidence from the UAE Banking Sector

Abstract

This study investigates the impacts of corporate governance mechanisms (CGMs) on earnings management (EM). Data covering 12 years (2009–2020) were collected via annual reports of the listed national banks in the UAE. Data were analyzed using descriptive statistics, correlation analysis, ordinary least squares (OLS) estimator, generalized least square (GLS) estimator and panel-corrected standard error (PCSE) estimator. Discretionary accruals were estimated using the adjusted Jones model as suggested by Dechow ( Contemporary Accounting Research, 1996, vol. 13, pp. 1–36). The overall findings of the study indicate that audit committee and ownership structure are not effective in mitigating managers’ opportunistic earnings management activities in the UAE banking sector. Hence, the assumption that audit committee and ownership structure have a negative impact on earnings management could not be ascertained. However, board characteristic was found to exert a diminishing effect on earnings management. Given that weak CGMs could fail to deter earnings management practices, the policymakers of the financial institution such as the banking sector should ensure that the CGMs are strengthened, and efforts should be exerted to facilitate strict adherence to measures that will diminish earnings management activities. The present study has contextual limitations to the UAE. Hence, the interpretation of the result is limited within this context.