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ABSTRACT
Corporate governance can reduce or even eliminate the extent of earnings management. Normally, an institutional environment that provides better legal protection can control managers' self-interest to a certain extent. Takeover force can exert market pressure on managers to do the best for shareholders. Prior studies have investigated different corporate governance mechanisms that can have negative relationships with earnings management. Board independence can enhance certain monitoring behaviors in managers, including the misappropriation of assets. Female directors can develop trust leadership, which requires managers to share information, and are more likely to be risk-averse to frauds and opportunistic earnings management. An audit committee can oversee the internal control for financial reporting and the quality of financial information. Directors with financial expertise can provide incremental control effects on earnings management, especially in firms with weak corporate governance. This paper contributes to corporate governance by providing detailed reviews of different corporate governance mechanisms, reviewing the latest findings on classification shifting, and summarizing earnings management measures, including a new diagnostic system. In the future, this new diagnostic system may be investigated in different contexts.
Keywords: Corporate Governance; Earnings Management; Literature Review
1. INTRODUCTION
Corporate governance continues to be an area of importance while earnings management still appears to be a problematic issue. This paper aims to review the extant literature and examine whether the evidence supports the view that additional corporate governance and regulatory measures will mitigate earnings management. However, this paper does not address the agency theory behind corporate governance mechanisms, as reviewed by Shleifer and Vishny (1997). This study contributes to the corporate governance literature by providing detailed reviews of the various corporate governance mechanisms, reviewing the latest findings on classification shifting, and summarizing earnings management measures, including a new diagnostic system. Many studies argue that some of the currently used accrual models are questionable; hence, it would be better to review the latest findings in earnings management measurements. In the future, this new diagnostic system, as well as Dechow's novel model, may be investigated in different contexts. The remainder of this paper is organized as follows. Section 2 introduces the concept of corporate governance. Section 3 presents various corporate governance mechanisms. Section 4 reviews different types of earnings management. Section 5 reviews different measures of...