The Moderating Effect of Family Ownership on Corporate Governance Effectiveness and Earnings Management in Jordan.

​Abstract

The association between corporate governance mechanisms and earnings management is the subject of increasing public and regulatory interest. Research has shown that good corporate governance practice can lead to reduce the level of earnings management. While there has been research examining corporate governance practices and earnings management in other contexts, there is however a general lack of research that investigate this issue within the Arab or Middle East context, particularly in the setting like Jordan. This study focuses, first, on examining the relationship between the corporate governance mechanisms related to board of director's characteristics, the audit committee characteristics, external audit and earnings management. Second, this study investigates whether earnings management is influenced by the board of directors and audit committee effectiveness. Third, the study also examines whether family ownership moderates the relationship between board of directors and audit committee effectiveness and earnings management. This study uses a secondary-data and the population study's consists of all industrial firms listed on Amman Stock Exchange (ASE) over the period 2009-2013. Using a random effect panel data model, the results reveal that board independence, audit committee independence and audit committee financial expertise are negatively associated with earnings management at significant levels. Moreover, the results indicate that the big 4 auditors are not significantly associated with earnings management. Additionally, the effectiveness of board of directors and audit committee has significant negative influence on earnings management. Based on hierarchical regression analysis, the results show that the relationship between the effectiveness of board of directors, audit committee effectiveness and earnings management become weak when there is interaction with the family ownership control. The results of this study could be useful to regulators in their attempts to constrain the incidence of earnings management and enhance the quality of monitoring mechanisms, especially in an environment where the capital market is still evolving and the legal protection and law enforcement is weak.

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