Corporate Governance and Earnings Management: A Banking Industry Perspective

This paper addresses interrelation of corporate governance mechanism and income-increasing earnings management from a banking perspective. Specifically, it investigates the impact of Hong Kong Corporate Governance Code (measured by board and audit committee characteristics) on earnings management, using a sample of 28 banks listed in Hong Kong Exchanges and Clearing Market from 2005 to 2016. By using two earnings management proxies, namely small positive net income (SPOS) and loan loss provisions (LLP), applying logit and linear regression models respectively, this study documents that increasing number of committees under board of directors (NOCOM) and proportion of audit experts on audit committee (AUEXP) will decrease the tendency as well as the magnitude of upward earnings management in banks listed in Hong Kong. The paper adds to the body of research on corporate governance and earnings management in the East Asian region and help regulators to find out the effectiveness of Corporate Governance Code in constraining opportunistic behavior in the banking industry.