CORPORATE GOVERNANCE MECHANISM AND EARNING MANAGEMENT: MODERATING ROLE OF CAPITAL STRUCTURE

Abstract

This study conducted an analysis of the impact corporate governance has on earnings management in the context of manufacturing companies operating in Saudi Arabia. Furthermore, the research investigated potential moderating effects within the correlation between corporate governance and earnings management. Employing a quantitative research approach, data were gathered from the annual reports of 50 manufacturing firms listed on the Saudi Arabia Stock Exchange during the period spanning 2014-2022, utilizing a cross-sectional research design. Panel data analysis techniques, including pooled, random, and fixed effects, were applied using STATA software. The empirical findings of the work presents a positive and statistically significant correlation between corporate governance practices—specifically, board independence, meetings, composition, managerial ownership, and gender diversity—and earning management, aligning with theoretical expectations derived from agency theory. In contrast, institutional ownership and board size exhibited a negative association with earning management. Moreover, the study brought attention to the noteworthy moderating impact of capital structure, where elements such as board size, board meetings, board composition, independence, and managerial ownership interacted synergistically with capital structure, thereby enhancing its efficacy in mitigating earning management. However, certain governance factors, such as gender diversity and institutional ownership, demonstrated adverse moderating effects. The implications drawn from the study underscore the significance of a robust governance framework within the Saudi manufacturing sector. Recommendations include advocating for larger and more diverse boards, reinforcing independence, and aligning managerial interests with those of shareholders. Recognizing the interplay between governance mechanisms and financial structures becomes imperative for the effective management of earnings. The study concludes by acknowledging its limitations and suggesting avenues for future research.