Earnings quality and corporate governance following the implementation of Malaysian code of corporate governance

This paper investigates the association between corporate governance mechanisms and earnings quality after the implementation of the Malaysian Code of Corporate Governance in 2001. Using 1625 firm-year observations during the period 2003-2007, we tested whether corporate governance variables are significant determinants of earnings quality. We regressed eleven corporate governance variables on earnings quality proxies, which were estimated using the modified Jones (1991) and Kasnik (1999) models. We found that (1) size of the board of directors and (2) size of the audit committee, are positively associated with the level of earnings quality. This indicates that large boards of directors and audit committees are more effective in performing their governing roles than smaller boards and audit committees. However, while the monitoring effectiveness of audit committees is consistent throughout the sample, the effectiveness of board governance is limited to government-linked and state-owned companies. Our findings suggest that adopting the code without considering the local institutional framework may not be efficient. As this study was conducted on a large sample of firm's over a reasonable time-frame, the results capture a strong picture of the association between earnings quality and corporate governance in Malaysia.