The model for relationship between corporate governance and earnings quality

Subject Areas : Management Accounting

Hashem Nikoomaram ¹ , Heydar Mohammadzadeh salteh ²

1 - (نویسنده مسئول و طرف مکاتبه
2 - ندارد

Received: 2010-05-05 Accepted : 2010-06-20 Published : 2010-03-21

Keywords: Strength of corporate governan, Adequacy of corporate governan, Earnings&#x0D, &#x0D, quality,

Abstract :

This study investigates relationship between earnings quality (accrual quality,earnings persistence, earnings predictive ability and CFO-Operating income ratio) andcorporate governance dimensions (strength and adequacy) at listed companies inTehran Stock Exchange. Under the premise that firms that have good performance inthe past have less residual agency problem, we use ROE as a measure of the adequacyof corporate governance in place. We use constructed G-Index from corporategovernance mechanisms as a measure of the strength of corporate governance. Wefind that is no correlation between factors of corporate governance (non-executivedirectors board, institutional investors, audit type, ownership type, parent and freefloat share) and earnings quality indexes. We find that reporting/earnings quality -accrual quality, earnings persistence, earnings predictability and CFO-Operatingincome ratio (CFO/OI) is higher for firms that have good performance in the pastregardless of whether the corporate governance levels were strong or weak. We alsofind that reporting/earnings quality is higher for such firms after controlling for thestrength of corporate governance.