The model for relationship between corporate governance and earnings quality

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