Impact of Corporate Governance on Earnings Management: Evidence from Sri Lankan Listed Companies

Janani Subhasinghe and Sampath Kehelwalatenna

The purpose of this study is to investigate the relationship between selected corporate governance mechanisms and the degree of earnings management of Sri Lankan listed companies. The study was carried out by using quantitative methodology and using secondary data primarily obtained through published annual reports of 175 non-financial companies listed in the Colombo Stock Exchange during 2017 to 2019. The study examined the relationship between eight selected corporate governance characteristics and level of earnings management which measured through discretionary accruals. Empirical results of the study reveal a noteworthy positive relation between frequency of audit committee meetings and earnings management. This finding is contrary to the results of most previous studies. The remaining corporate governance characteristics are not having a significant impact on the level of earnings management. This study adds some new evidence on the relationship between selected corporate governance mechanisms and the degree of earnings management of Sri Lankan listed companies as it used data of post implementation period of new Code of Best Practice of Corporate Governance 2017. Findings of the present study differ from available limited studies on the relationship between corporate governance and earnings management in Sri Lankan context as previous studies reported inconclusive relationships whereas the present study established at least one conclusive relationship between frequency of audit committee meetings and earnings management.