The Relationship Between Corporate Governance And Earnings Quality

Earnings quality is not just only a simple accounting question, and corporate governance is one of important factors that influent earnings quality. If we want to assess a firm's earnings quality, the environments of the firm's corporate governance must be considered. Commonly, we think firms that have better corporate governance, such as have rational directors board or reasonable shareholder structure, should have better corporate performance or earnings quality than that of have worse corporate governance, because the manager will be supervised more efficiently. In those firms that have better corporate governance, their statements could really reflect the true conditions of the firms, so the earnings quality could be better than that have worse corporate governance. In this paper, we select 21 base factors about corporate governance, including shareholder structure, large shareholder's behavior, the director board characteristic, the supervisor board characteristic, management inspirit and information disclose, and design a general corporate governance index(CGI) use principal components analysis(PCA). We talk about the relation between corporate governance and earnings quality, and we deeply research the relationship use panel threshold model. Ultimately, we study the influence of corporate efficiency and corporate governance strength to earnings quality.The empirical analysis indicates that, in some extent, shareholder structure, board characteristic and other corporate governance base factors we selected influent the earnings quality. For example, earnings quality is better when the control shareholder is state than that of non-state. The percent of shares that the first large shareholder holds is positive correlate with earnings quality. The percent of float shares is negative correlate with earnings quality. The ratio of other large shareholder holdings share with the first large shareholder holding is significantly negative relation with earnings quality. Investors have felt the "tuning" of control shareholder. The empirical result also indicates that the number of director board is significantly positive relation with earnings quality. The independence of director board has different correlation with earnings quality before and after the ordination of the guidelines about independent directors' instauration in listed companies. There has no significant influence to earnings quality when chairman of the board and CEO is duplication. The managers' salary has not significantly correlation with earnings quality, but managers' shareholding has. There have relatively lower earnings quality if the annual report audit opinion is labeled qualified. And the earlier of annual report is issued the higher earnings quality firms have. In linear model, the CGI is significantly negative relate with earnings, but in quadratic equation model, the relationship is U shape.In order to thoroughly analysis the relationship between corporate governance and earnings quality, we introduce Hansen's (1999) panel threshold model. Threshold regression models specify that individual observations can be divided into classes based on the value of an observed variable. This paper also introduces econometric techniques appropriate for threshold regression with panel data. Least squares estimation methods are described. An asymptotic distribution theory is derived which is used to construct confidence intervals for the parameters. A bootstrap method to assess the statistical significance of the threshold effect is also described. The methods are used to investigate whether corporate governance has threshold affects with earnings quality. Empirical result indicates that there actually exist threshold effect on the relationship between first large shareholder holdings and earnings quality, also the ratio of other large shareholder holdings share with the first large shareholder holding, independence of director board and the CGI have one or two threshold value. In the PTM the relationship of CGI and earnings quality is also U shape.We also investigate whether earnings quality is affected by the efficiency rather than the strength of corporate governance. The empirical analysis result indicates that firms with effective corporate governance will have higher earnings quality relative to firms with ineffective corporate governance, regardless of the strength of corporate governance. After controlling for the strength of corporate governance, firms with effective corporate governance will have higher earnings quality relative to firms with ineffective corporate governance. There is no difference in earnings quality between firms with strong corporate governance and firms with weak corporate governance, as long as the corporate governance is effective. But, firms with strong corporate governance will have higher earnings quality relative to firms with weak corporate governance if the corporate governance is ineffective.