RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND EARNING MANAGEMENT IN THE UNITED KINGDOM

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CHAPTER 1: INTRODUCTION

This study has been divided into different sections. The first chapter is the introduction that will present a background of the study, research question, objective of the research, and significant of the research. The second chapter is the literature review. The literature review will explore and present different concepts associated with the topic. It will also present a review of the related literature. The third chapter will present the methodology that will be adopted for the research. The third chapter will also include sample selection and research instrument. The fourth chapter will present the findings of this research. In the fifth chapter, the conclusion of the study will be presented.

The objective of this research is to study the relationship between corporate governance and earning management in the United Kingdom. The study will focus on the relationship between corporate governance and earning management in UK firms. The corporate governance environment of United Kingdom is different from others. Therefore, the study will provide some interesting findings and results of corporate governance.

CHAPTER 2: LITERATURE REVIEW

Earnings Management

There are diverse forms of earning management. This research will provide an understanding of earning management and different factors that may encourage managers to practice this concept.

Definition of Earning Management

Earning management is a phenomenon that takes place when managers' judgment is involved in financial reporting and structuring. Managers use their judgment in order to bring modifications to financial reports. Earning management may occur because of two reasons. One of the reasons is to hoodwink stakeholders about fundamental economic performance of the company or to affect contractual outcomes (Healy and Wahlen, 1999, pp.365).

According to one research, earning management could also provide some benefits by providing management with a way to convey private information about the performance of a firm. When there is a conflict between the welfare of managers and shareholders, there is a danger of the loss of wealth.

In opportunistic earning management, managers look for ways to mislead investors. Opportunistic earning management is solely for the interests of the management. According to Healy (1985), managers use accruals in order to manipulate results strategically. As a result, earning management yields gains for managers and loss for stockholders. This phenomenon takes the form of increased compensation. The studies conducted on earning management have provided evidences between earning management and managerial compensation (Burgstahler & Dichev, 1997, pp. 99).

The prior studies conducted on the topic of earning management have identified different situations in which earning management is likely to occur. According to different studies, it is has been found that firms that have small positive earning have higher a frequency that expected. On the other side, the firms with negative and small earning have less frequency than expected. The studies have suggested that managers avoid reporting loss because it provides them with incentives. Therefore, in order to get incentives, managers go avoid earning declines and reporting loss. According to Barth et al (1999), managers meet this benchmark because ...