Corporate Governance Mechanism Towards Earnings Management: Does Financial Distress Could Make It Better?

Abstract

This study aims to assess the impact of institutional ownership, managerial ownership, board size, and audit committee size on earnings management, with a focus on the intervening variable of financial distress. Employing a causality research design, secondary data were derived from the annual financial reports of State-Owned Enterprises listed on the Indonesia Stock Exchange for the period 2017–2021, encompassing 20 companies. A purposive sampling technique was applied to select a sample of 11 companies, and data processing and analysis employed path analysis and t-tests through the IBM SPSS 25 analysis tool. The findings reveal that managerial ownership exerts a negative influence on financial distress, while audit committee size exhibits a positive impact on financial distress. In contrast, institutional ownership and board size do not significantly affect financial distress. Financial distress, in turn, influences earnings management and serves as a mediator in the relationship between audit committee size and earnings management. However, financial distress does not act as a mediator for the effects of institutional ownership, managerial ownership, and board size on earnings management. The study underscores that the implementation of good corporate governance practices within companies can effectively mitigate earnings management practices and safeguard against the onset of financial distress.

Keywords: institutional ownership, managerial ownership, size of board of directors, audit committee size, financial distress, earnings management.

DOI: 10.7176/RJFA/15-2-06

Publication date: January 31^st 2024