The Effects of Earnings Management and Corporate Governance on Corporate Value

Abstract

[Purpose]Companies want to improve corporate governance to solve the agency problem because the agency cost incurred by the separation of management and ownership makes it difficult to maximize corporate value, which is every company’s goal. Most scholars argue that earnings management is a chronic disease that cannot be cured in the capital market due to the effect of earnings management on listed companies and the glorification of performance. On the contrary, some scholars believe that earnings management behavior has a positive effect on companies by increasing corporate value. Therefore, this study aims to analyze how earnings management and corporate governance of listed companies in China affect corporate value. [Methodology]To address this debate, this study conducted an empirical analysis of data from 2014 to 2019 to analyze how the earnings management and corporate governance of Chinese listed companies affect corporate value. [Findings]It was found that the regression coefficient of the outside director ratio, which is the proxy variable of corporate governance, and the interaction variable between manager compensation and earnings management had a statistically significant negative (－) effect. In other words, as expected from the hypothesis, the more frequent the earnings management behavior, the more negative the ratio of outside directors and manager compensation was for corporate value. On the other hand, the regression coefficient of the interaction variable between the largest shareholder’s equity ratio and earnings management, which are proxy variables of corporate governance, had a positive (＋) relationship with corporate value, but it was not significant. [Implications]This study aims to provide useful information to corporate information users through an empirical analysis of how the interaction variables of corporate governance and earnings management affect corporate value using data from Chinese listed companies that are rapidly developing not only quantitatively but also qualitatively.