Journal of Environmental Treatment Techniques  
2020, Volume 8, Issue 3, Pages: 1124-1131  
J. Environ. Treat. Tech.  
ISSN: 2309-1185  
Journal web link: http://www.jett.dormaj.com  
Earnings Management, Corporate Governance and  
Corporate Performance Among Malaysian Listed  
Companies  
Mojtaba Nasiri*, Suresh Ramakrishnan  
Azman Hashim International Business School (AHIBS), Universiti Teknologi Malaysia, Malaysia  
Received: 06/02/2020  
Accepted: 12/07/2020  
Published: 20/09/2020  
Abstract  
There are several explanations for lack of transparency regarding financial reporting however the most significant is earnings management  
activities that managers follow. Admittedly, managers manipulate accounting information by using EM (Earnings Management) practices to  
achieve certain results. Corporate governance, which its primary objective is to spot possible structures in which a corporation's shareholders  
have greater power and control over managers to protect and further their rights, and it has recently brought an interesting topic to researchers  
and policymakers around the world. Most research has emphasized the relationship between corporate governance and company performance,  
but still, only a few investigations have looked at the moderator characteristic of corporate governance on corporate performance from  
different perspectives. This study aims at investigating whether corporate governance, utilizing data from listed companies in Bursa Malaysia,  
impacts the relationship between earnings management and the firm ’s performance. This study utilizes panel data analysis and uses FTSE  
Russell data by applying the intersection method to the constituents of the FTSE Top 100 Bursa Malaysia from 2011 to 2015. The findings  
show that DAs have a considerable impact on the ROA, ROE, Tobin's Q and EVA of companies in a poor governance system. This research  
reveals that managers in weakly managed companies are far more likely to misuse accounting powers than in well managed companies,  
leading to a decline in corporate performance. Managers are likely utilizing DAs to modify the financial profits; however, this produces a  
rather more significant reversing impact in corporate interest in the period ahead. Likewise, DAs inside an efficient governance structure are  
strongly and substantially related to firm performance.  
Keywords: Corporate governance; Firm performance; Earnings management  
Introduction1  
potentially influence performance, should be examined.  
1
Moreover, earnings management (EM) is essential for  
shareholders and regulators globally. This is because EM is  
correlated to executives conducting themselves purposefully, in  
particular misrepresenting financial reports. (3). To order to  
control earnings, management uses accounting strategies to adjust  
the accounting figures and to control accrual identification, i.e.  
In recent years there has been an increase in the number of  
studies that have examined the performance of firms, which has  
subsequently led to an expansion in the body of literature. Due to  
the significant importance of performance measurements  
implemented in various corporate firms, evaluation of firm  
performance has become increasingly essential. Furthermore, the  
challenges that various firms encountered during the Asian and  
global financial crises, has consequently impacted the  
performance of these corporate firms (1). When a business is  
incapable of achieving its obligation commitment, it results in  
poor performance. Since the stock market plays a significant role  
in a countries’ economic growth, its performance measurement  
has become a central topic in management research on financial  
performance (2). The increasing number of companies in the  
competitive environment has emphasized the need for addressing  
their performance. A companies’ performance listed in the stock  
market can be evaluated by assessing the past and current trends  
and subsequently determining future estimates. In order to  
achieve short and long-term obligations, various factors that may  
'accounting choice management.' In addition, managers can shape  
various operational choices that could impact actual cash flow  
transactions, i.e. 'economic benefit management'(3-10).  
Managers are usually compelled to manage earnings because of  
various market pressures as well as the need for self-preservation  
to prevent breaking contractual agreements (11-13). Moreover,  
during a financial crisis, there would be a higher tendency among  
managers to manage earnings (14), as listed below. The  
following. A few of the largest corporations were behind the  
global economic crisis that emerged in the united states (15, 16).  
Crotty (2009) called it the "severe economic collapse since the  
Great Depression"(17, 18). The extreme recession "pushed the  
world economy to the verge of depression" as said by Crotty  
Corresponding author: Mojtaba Nasiri, Azman Hashim International Business School (AHIBS), Universiti Teknologi Malaysia, Malaysia.  
E-mail: nmojtaba3@live.utm.my and mojtaba.1986.nasiri@gmail.com.  
1
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Journal of Environmental Treatment Techniques  
2020, Volume 8, Issue 3, Pages: 1124-1131  
(2009) (17). Rudd (2009) has also referred to the financial  
selection.  
collapse as "one of the biggest attacks on world economic  
stability," triggering a "significant slump in world trade and  
global financial crisis"(3, 16, 19). The US financial crisis  
immediately reached the globe, negatively impacting the world's  
economy and world capital markets (20-23). Ultimately, the  
Asian economies also were disrupted by the global financial  
meltdown, including the Malaysian economy (24-26).  
About 2008 the adverse impact of the United States financial  
crisis in the Malaysian economy had detrimental impacts on  
financial and trade networks (19, 27). In the fourth quarter of  
This study aims to investigate whether the relationship  
between earnings management and firm performance is affected  
by corporate governance, in the Malaysian context. Since a  
corporate governance mechanism involves  
a
set of  
comprehensive structures that could comprise of opposing  
attributes, the various factors of governance should be  
incorporated with specific objective criteria, when evaluating the  
quality of governance of an organization (37).  
A brief summary of the development of the Malaysian  
Corporate Governance Code will be presented. This study  
attempts to elucidate the role of corporate governance in  
influencing the association between earnings management and  
company performance and identifying which particular  
components might have a greater impact on this relationship. This  
study explores two fundamental issues related to corporate  
governance and corporate performance that have yet to be  
addressed sufficiently in the existing literature, specifically how  
different components of corporate governance may potentially  
affect the relationship between earnings management and firm  
performance. This study also considers the relevant existing  
literature and will elaborate on the processes of corporate  
governance and concentrates particularly on the concept of  
agencies. The importance of this study will be further  
demonstrated through an academic and technical context. The  
current study will investigate corporate governance in the  
Malaysian context, as it is a good model as an emerging market  
that is developing. Thus, transparency of information is necessary  
in order to achieve more stable and smooth trends, as well as to  
limit fraud potential.  
2
008, Malaysian Gross Domestic Product (GDP) declined by 12  
percent and declined significantly in the subsequent year. In early  
009, exports dropped dramatically by 28% compared to the prior  
2
year (28). Furthermore, foreign direct investments plummeted 17  
percent in 2008 compared to the previous year, however direct  
investments overseas by Malaysian companies increased (28).  
This was indicative of funds flowing out of Malaysia during this  
particular financial crisis, which contributed further in adversely  
affecting Malaysia’s real economy, causing a loss in industrial  
production and jobs (28). According to The World Bank Report  
(2009), as much as 120,000 workers were reported to have been  
retrenched in Malaysia (29). In addition, during the financial  
crisis, the Malaysian stock market was more volatile and had  
increased leverage. Consequently, managers of Malaysian  
companies were more pressured to manage earnings during this  
crisis period and following it, to retain investors amidst the highly  
volatile stock market, and also to avoid violating debt covenants  
during increased leverage. These various reasons may have  
pushed them to make the decisions they did, to try and safeguard  
the survival of their company, and subsequently avoiding  
retrenchment of their employees (30, 31).  
Conversely, as reported by the International statistics, the  
Asian financial crisis was believed to affect Asian economies  
more than the global financial crisis (22, 32). Thus, it was  
believed that Asia was not affected as severely by the global  
financial crisis in comparison to other continents. From the  
literature (33) it has been demonstrated that, during a crisis phase,  
companies are inclined to use income decreasing EM. The  
discretionary accrual method of deliberately reducing earnings  
management through the "theory of big bath " (3). Thus,  
Malaysian companies could also have resorted to applying the  
reverse during the global financial crisis phase, by managing  
earnings downwards (decreasing revenue) instead of upwards  
2
Background of study  
During the global financial crisis, EM was studied in Europe  
by two key reports, Iatridis and Dimitras (2013) and Filip and  
Raffournier (2014). The research study of Iatridis and Dimitras  
(2013) included firms comprising five European countries,  
namely Greece, Ireland, Italy, Portugal and Spain; while the  
sample of Filip and Raffournier (2014) included 16 European  
countries. In order to evaluate EM, the former used discretionary  
accruals, and their findings showed that Portugal, Italy and  
Greece were involved in more EMs, and Ireland was involved in  
no EMs. In Spain, however, the results for EM were in dispute  
(38, 39). In order to evaluate EM and smoothing income controls,  
Filip and Raffournier (2014) have used discretionary accruals.  
Throughout the period 2006 to 2009, during which European  
businesses implemented IFRS, the analysis was carried out.  
Based on the result obtained, the EM decreased dramatically in  
the financial crisis era, which contributed both to positively and  
negatively excesses. (39). The Cimini (2015) report also explored  
European EM activities but for a longer period, from 2006 to  
(
increasing revenue). So, it is extremely likely that Malaysian  
companies conducted EM during the global financial meltdown  
34). They may have studied more EM or introduced more  
(
revenue-enhancing EM procedures, or more revenue-decreasing  
EM practices. There is, however, a lack of EM research by  
Malaysian firms during the global financial crisis, and the  
investigation is therefore required in order to analyse EM in  
Malaysia during the recent global financial crisis (35).  
In order to evaluate and predict the severity of EM practices  
by Malaysian companies during a crisis period, EM must initially  
be assessed during a non-crisis period (36). ASEAN countries  
were faced with the financial crisis in 1998 and the current  
research is likely to be more representative and effective, as this  
study aims to investigate specific nations from the Asian market  
that were clearly affected by the Asian financial crisis. Taking  
into consideration these criteria, a developing and rapidly  
growing economy like Malaysia would be the most suitable  
2
012. It was found similar results, with a decrease in abnormal  
accruals across most of the euro nations investigated during the  
crisis (40).  
The Generally Accepted Accounting Principles (GAAPs)  
facilitate managers to practice flexibility throughout the  
accounting process while preparing financial reports. Managers  
apply various accounting options to improve interrelated  
decision-making like expense control, capital budgeting and  
transfer pricing (41). However, this also allows managers to  
potentially abuse their authority while taking advantage of the  
interests of other groups involved. There has been a lengthy-  
1
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Journal of Environmental Treatment Techniques  
2020, Volume 8, Issue 3, Pages: 1124-1131  
standing controversy in accounting research, concerning  
managers who may potentially exploit specific financial  
instruments in a manipulative way. (11, 42).  
Earlier studies have demonstrated how managers prefer  
specific accounting techniques and how certain methods  
influence the quality of corresponding corporations. Holthausen  
countries, EM in Malaysia is worse than Thailand, Taiwan, India,  
and Pakistan. Due to the importance of EM and its wealth of  
research, little is known about earnings management in family  
ownership (67). Furthermore, top 15 families in Malaysia were  
also found to control assets worth 76% of the country’s gross  
domestic product (GDP) as reported by the Malaymail online on  
April 17, 2015, edition (68).  
(1990) presented three viewpoints on the use of accounting  
methods namely, duplicitous behaviour, effective contracting and  
data (43, 44). Several previous research seemed to concentrate on  
the opportunistic point of view, indicating that business  
executives are likely to misuse accounting efficiency in order to  
increase their own money at the cost of shareholders (45-48).  
Conversely, the active contracting view suggests that accounting  
practices are effective when managers look after the interests of  
investors and successfully apply accounting decisions to mutually  
maximize decision-making, as well as react appropriately to  
various circumstances (49, 50). Specifically, accounting methods  
can be selected to demonstrate the assumptions of management  
regarding future cash flows of an organization, which would lead  
to increased information about earnings that is compatible with  
the information context (51, 52). Accounting strategies could  
thus attain substantial benefits and stockholders (53-55).  
Previous studies have demonstrated the diverse consequences  
of earnings management on corporate performance. The  
manipulation of profits may be practiced under opportunistic  
circumstances by managers by exploiting the flexibility of  
accounting however, the framework of corporate governance  
plays an integral part in curbing deceptive earnings management  
and consequently making sure that managers work in the favour  
of investors (51, 52). In recent years, extensive research has been  
carried out to investigate whether corporate governance prevents  
or controls the “avaricious actions” of managers in terms of  
accounting preferences (56-58) and increases firm benefit (59-  
According to Berle and Means (1930), the distribution of  
equity among financial investors tends to decrease control and  
moves authority to the managerial groups. Administrative staff  
and shareholders have specific profits, and potential conflicts  
could arise that could be problematic to the organization (69).  
Jensen and Meckling (1976) explained how under such  
circumstances where the investor is the principal and the  
supervisor the agent, could be potentially problematic and have a  
negative impact on firm performance and its value (70).  
Likewise, Jensen and Meckling described how conflicts could  
arise from the debt link between creditors and organizations.  
Furthermore, La Porta, Lopez-de-Silanes, Shleifer, and Vishny  
(1997) reported that(71), both major and minor investors are  
being subjected to additional serious agency problems,  
particularly in nations which have inadequate investor security. It  
is apparent that various factors and conditions affect  
agency relationships within an organization. Thus, overcoming  
these conflicts, specific principles and guidelines should be  
implemented in order to guarantee that organizations are well  
governed and efficiently organized to improve and sustain  
progress. Without such guidelines and procedures in place, these  
potential problems could adversely affect firm performance (63,  
72). The agency theory has suggested two kinds of governance  
elements for reducing agency problems namely; external and  
internal structures. The external structure includes, the market for  
corporate control, the variable and product market and the legal  
structure (70).  
6
2). Organizations that employ powerful governance systems are  
generally less likely than organizations with weak governance  
mechanisms, to practice EM (56, 57). Tang (2012 ) indicated that  
entities with larger boards, higher institutional ownership and a  
non-dual management structure are more vulnerable to scrutiny  
and consequently much less likely to gain from risky accounting  
options than issuers without these components (62). Chen et al.  
The internal systems, on the other hand, include the  
arrangement of ownership, the board of directors, remuneration  
of the company, and financial policies. Agency theory control  
instruments could potentially provide the required assurances as  
well as provide balanced governance into the processes of an  
organization. Additionally, more order is placed on both investors  
and administration due to these factors. A number of studies  
carried out in various countries have investigated the correlation  
between corporate performance, earnings management  
and corporate governance mechanisms. These studies revealed  
that undeniably corporate governance practices could protect  
shareholders, the organization's value as well as improve  
corporate governance (73-77).  
(2007b) indicated that effective corporate governance could  
theoretically mitigate the manipulation of versatility in  
accounting and thus increase financial performance (56).  
Corporate ownership is focused in East Asia, whereas in the  
U.S. and UK it differs from prevalent ownership. Practices in  
developing economies usually make use of “pyramid  
frameworks” and “crossholdings” between organizations in order  
to improve their control rights, which leads to an extensive gap  
between their control rights and cash flow rights (63). Thus in  
East Asian organizations, there is usually more discord between  
regulating investors and minority shareholders rather than  
between management and investors (64, 65). Subsequently, a  
conflict between groups prompts owners to capture minority  
interests through earnings management. Leuz and Wüstemann  
3
Research objectives  
To examine the effect of corporate governance mechanisms  
on the relationship between earnings management activities and  
firm performance in listed companies of Bursa Malaysia.  
4
Data analysis and Scope of the study  
Preliminary analysis of the data collected was completed to  
(2003) conducted a survey regarding 31 countries to benchmark  
EM, and the Malaysian stock market was ranked number 20 in  
overall earnings management (66). Enomoto et al. (2015)  
compared two types of EM (accrual earnings management, AEM  
reflect the period of the years 2011 until 2015. At this stage,  
corporations with any missing data were excluded from the  
research, whereby the final sample size was reduced to 84 listed  
companies in Bursa Malaysia from FTSE Top 100 index. To  
evaluate the interactions proposed from the hypotheses as stated  
&
real earnings management, REM) across 38 countries and  
found that two types of EM in Malaysia are more pervasive than  
other nations, particularly REM. Out of the four South East Asian  
1
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Journal of Environmental Treatment Techniques  
2020, Volume 8, Issue 3, Pages: 1124-1131  
in the conceptual platform, the STATA 12.1 statistical program  
and SPSS 22 were utilised. In this study, panel data analysis was  
applied, and different steps were available for a diagnostic test.  
EVA it = α0 + B1DACit + B2CEODit + B3 DS it + B4SBS it +  
B5BM it + B6SBM it + B7 ID it + B8 NID it + B9 FO it + B10  
SX it + B11 WB it + B12 AMG it +B13 NRCM it +B14 ACI it  
+
*
B15 (DACit * CEODit ) + B16 (DACit * DS it ) + B17 (DACit  
SBS it ) + B18 (DACit * BM it ) + B19 (DACit * SBM it ) +  
5
Hypotheses and Models  
Based on the literature regarding the objective, this study  
B20 (DACit * ID it ) + B21 (DACit * NID it ) + B22 (DACit *  
FO it ) + B23 (DACit * SX it ) + B24 (DACit * WB it ) + B25  
recommends Hypotheses 1 to 4 and model 1 to 4 as follows:  
Hypothesis 1: Corporate governance activities have a significant  
effect on the relationship between earnings management and the  
ROA of the listed companies in Bursa Malaysia.  
(DACit * AMG it ) + B26 (DACit * NRCM it ) + B27 (DACit *  
ACI it ) + B28 LEV it +B29 LMV it + B30 MB it +e it  
Corporate Governance as moderator (CEOD = CEO Duality,  
DS = Board size, SBS = Supervisory Board Size, BM = Board  
Model 1  
Meetings, SBM  
=
Supervisory Board Meetings, ID  
=
ROA it = α  
it + B SBM it + B  
it + B12 AMG it +B13 NRCM it +B14 ACI it +B15 (DACit * CEODit  
+ B16 (DACit * DS it ) + B17 (DACit * SBS it ) + B18 (DACit * BM  
it ) + B19 (DACit * SBM it ) + B20 (DACit * ID it ) + B21 (DACit  
NID it )&nbs