Corporate Governance and Equity Ownership Concentration and their Impact on Earning Management in Emerging Markets: The Case of Saudi Listed Companies

Abstract

Saudi Arabia has adopted governance reforms to protect stakeholders and enhance investor confidence in financial statements by reducing earning management practices. The legislators have also recently sought to encourage foreign investment by opening the financial market to foreign investors in the largest Arab financial market. This study seeks to test the impact of the good practice of corporate governance and the structure of ownership in reducing and mitigating the earning management in the Saudi listed companies. The study used the quantitative approach to test this relationship statistically by adopting index to measure the good practice of governance by listed companies. In addition, this study used number of independent governance variables and ownership structures. The study also adopted Balanced Panel Data as an ideal method in the study of corporate governance as behavior. The study used a sample of 80 companies for a period of seven years from 2004 to 2010. The study found a number of results that companies with a good practice of governance are less likely for the corporate executives to manipulate financial statements. The results also showed a positive relationship between the size of the board of directors and earning management. The study did not find a statistical relationship between the size of the audit office and the opportunities for earning management by the management. Moreover, there was no relationship between the combination of the functions of the CEO and the chairman of the board of directors on the one hand, and earning management on the other. In terms of ownership structure variables, the study found that the increase ownership of investment institutions, government ownership and ownership of board members in corporate capital can mitigate earning management in listed companies.