Exploring the relationship between Earnings Management and Corporate Governance characteristics in the Indian context

Abstract

Earnings management in general should be undesirable as the tradeoffs are expensive for the owners in the long run. Indian companies characterized with relatively higher promoter shareholding and with dominance of family owned businesses should essentially be subscribing to the view that discretionary earnings management would be detrimental to the owners. However, depending upon market efficiency, the role of managerial discretionary accounting choices to signal better information may be argued for a certain amount of earnings management passing through the board’s scanner in Indian firms as shown by the results in this study. Corporate governance is a system of structures and processes to direct and control the functions of an organization by setting up rules, procedures and formats for managing decisions within an organization. It specifies the distribution of rights and responsibilities among company’s stakeholders (including shareowners, directors, and managers) and articulates the rules and procedures for making decisions on corporate affairs. It thus provides the structure for defining, implementing and monitoring a company’s goals and objectives and ensuring accountability to appropriate stakeholders. As we observe in several other facets of corporate life, corporate governance practices should not follow the one – size –fits – all principle. Practical examples in real life scenarios are signal enough to indicate the need for customizing these corporate governance norms for a country if not for an industry or a firm as a whole. The Maruti Suzuki’s recent handling of the dissenting employee union members by doling out considerable severance packages to them did not go too well with its institutional investors1 nor was it readily acceptable from good corporate governance disclosure norms point of view. Few companies if at all get the shareholders brunt for not so appropriate corporate board decisions in India, exception of course being the director’s resolution against Maytas acquisition by Satyam. There the implications were severe from shareholder’s wealth point of view, necessitating a near collapse of Satyam’s ADRs value.