The Relation between Corporate Governance Mechanisms and Earnings Quality

This paper examines the association between corporate governance mechanisms and the quality of accounting earnings. It is discussed and predictable that suitable corporate governance mechanisms make financial reporting more observable and prevent it from low quality. We investigate whether accrual quality, earnings persistence and earnings predictability are affected by the corporate governance. Also, we consider three corporate governance variables: extent of independent (non executive) directors, board leadership, and the number of meetings. We test our hypothesis using a sample of 600 firm-year observations of Tehran Stock Exchange (150 firms during 2005-2008). The findings show that the increasing the number of non executive directors and board meetings strengthen the firm’s earning quality (earnings persistence and its predictability). However, we find no relation between leadership structure and firms’ earnings quality (again, earnings persistence and its predictability). Surprisingly, our results indicate that there is no significant relationship between corporate governance and accruals quality as a measure for earnings quality.