The relationship between earnings management and corporate governance: An empirical study of top 100 UK firms during the 2008/2009 recession

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ACKNOWLEDGEMENT

My thanks go out to all who have helped me complete this study and with whom this project may have not been possible. In particular, my gratitude goes out to friends, facilitator and family for extensive and helpful comments on early drafts. I am also deeply indebted to the authors who have shared my interest and preceded me. Their works provided me with a host of information to learn from and build upon, also served as examples to emulate.

DECLARATION

I [type your full first names & surname here], declare that the following dissertation and its entire content has been an individual, unaided effort and has not been published or submitted before. Furthermore, it reflects my opinion and take on the topic and is does not represent the opinion of the University.

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TABLE OF CONTENTS



ACKNOWLEDGEMENTii

DECLARATIONiii

CHAPTER 01: INTRODUCTION1

Background of the Study1

Theoretical Framework2

Research Questions4

Aims and Objectives5

Significance of the Study5

CHAPTER 02: LITERATURE REVIEW6

Corporate Governance in the UK7

Earnings Management11

Motivations for Earnings Management13

Board structure and earnings management14

Ownership structure and earnings management17

Adviser structure and earnings management18

Estimating Discretionary Accruals19

REFERENCES22

CHAPTER 01: INTRODUCTION

Background of the Study

Financial reported earnings have dominant influence on full series business activities of a firm and its management decisions. The earnings could either affect investor's evaluation of the firm or impact contractual outcomes which are related to the financial leverage or compensation of managers. Therefore managers have strong intentions to fiddle with earnings figures to the desirable level. The flexibility of the current accounting principles also provides managers with significant ability to alter accounting earnings. The practice that management uses judgment in financial reporting and in structuring transaction to alter financial earnings is called “earnings management (Schipper, 1989, pp. 91)

Although earnings management is not new, the recent popularity of earnings manipulation has drawn serious deliberation from regulators, financial press and academic research. For example, in a speech at NYU centre of law and business in 1998, Author Levitt, the chairman of U.S security and exchange commission's (SEC), said earnings management impaired the quality of financial reporting. His comments showed a serious alarm of the unfavourable consequences of earnings management to the U.S capital market. Earnings management could also be unattractive to the shareholders. When the interests of the shareholders and managers differ, managers can manipulate earnings for their own purposes at the expense of shareholders. Hence how to improve the reliability and integrity of financial reporting is always subject of debate for researchers (Rangan, 1998, pp. 101)

Empirical evidences showed that US companies manage earnings around the pilot offering of shares (SEO) and investors do not recognize this. Jensen (1993), for example, believe that the company's earnings grow from the current discretionary accruals on the eve of SEO for the U.S. and argue that this manipulation and the subsequent change in the position to explain the proof of the positive and negative pre-SEO SEO after the abnormal stock returns. Recent data on the UK show that the firms have ...