Jurnal UMP Social Sciences and Technology Management Vol. 3, Issue. 3,2015

Transcription

1 Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 Evaluation of the Impact of Corporate Governance Components on the Relationship between Earnings Management and the Financial Performance of the Companies Listed in Tehran Stock Exchange Meisam Moayed Ahmadi, M.A Student of Accounting, Department of Accounting, Kish International Branch, Islamic Azad University, Kish Island, Iran Mohammad Hossein Safarzadeh Assistant Professor, Department of Accounting, Shahid Beheshti University, Tehran Abstract This research tries to investigate the influence of corporate governance on the relationship between earnings management and the financial performance of companies. Conflict of interests and the agencies-related problems since the separation of ownership as well as company's control has created so many problems. Manipulating and managing earnings in order to provide and display earnings desired by the management has led to many researches and studies in the field. These studies introduce methods through which to detect earnings management in companies on the one hand, and introduce and examine methods to prevent the management from manipulating the earnings on the other. This research has investigated the effect of corporate governance mechanisms on the relationship between corporate governance and the financial performance of companies. The goal of the research has been to investigate the relationship between earnings management and the financial performance in companies with strong and weak corporate governance mechanisms to see whether a firm performance is related to earnings management in companies in which there are corporate governance mechanisms such as independence of the board, dual roles of CEO, institutional investors, controlling shareholders and audit committee. The research hypotheses were tested using the panel data collected from 75 companies listed in Tehran Stock Exchange and using multiple regression models. The research results show that the corporate governance mechanisms have a positive effect in the sample companies selected from Tehran Stock Exchange so that these mechanisms have not played their own inhibitory and controlling tasks properly. Keywords: Corporate Governance, Earnings Management, Financial Performance, Stock Exchange Introduction The conflict of interests between the management and the owners of companies has been common since individuals other than company owners were assigned the duty of managing companies. Due to different reasons such as maintaining one's position and helping the company, company managers take measures which are not in line with the shareholders' interests; they publicise bad news late, concentrate on good news and announce them to the users much earlier than bad news, manage earnings and show them unreal so that they can realize the predictions that they have already made for coming years (Dutta, 2002). The scandals that occurred in companies such as Enron led to designing and implementing mechanisms to reduce conflict of interests. The mechanisms are all purported to control the management's activities in order to prevent him from doing activities to his own interest. One of these defined mechanisms which is compulsory in many companies is the mechanism of corporate governance. Corporate governance enacts what should and what should not be done in the governance system of a company, helping the company to control the managers' activities, performance and decisions automatically. The rules related to the structure 92

2 Evaluation of the Impact of Corporate Governance of board of directors, audit committees, capital, ownership, the board of directors' duties and independence all dominate mechanisms over the system so that the management cannot easily implement its own profitable activities (Aghaei, 2009). Previous studies have shown that many factors can create motivation for earnings management. A company's financial problems and the management's concerns about losing its position can create for the management a motivation to manipulate earnings. Showing earnings at an appropriate level and with proper stability and little fluctuation can also motivate manipulation of earnings management so that the firm performance can be shown in an appropriate condition. Many studies have been done concerning the relationship between earnings management and performance of companies with corporate governance. The relationship between earnings management and firm performance has been shown to be positive, negative or unrelated by different studies. The studies conducted in relation to the corporate governance mechanisms have shown that corporate governance mechanisms can be a neutralizing factor in the management's profitable decision-makings. However, the effect of this mechanism on the relation between earnings management and the financial performance of a company is its important aspect which has been left unnoticed by researchers and thus there exists a gap in this regard to be filled. This research tries to fill in this gap and seeks to answer the following question: Do the criteria of corporate governance affect the relationship between earnings management and the Theoretical fundamentals, Literature and Hypotheses Corporate governance Corporate governance has recently turned into one of the basic and dynamic aspects of the business world and it is increasingly receiving more and more attention. International organizations such as OECD provide international standards in this regard. The United States, Great Britain and other countries are continuing to promote their corporate governance systems and pay particular attention to shareholders and their relations, accountability, improvement of board of directors' performance, auditors, accounting systems and internal control. These systems mainly focus on methods whereby companies are managed and controlled. Furthermore, the partial investors, institutional investors, accountants, auditors and other actors of the money and capital market have become aware of the existential philosophy and the need to reform and improve corporate governance. The International Federation of Accountants (IFAC) defined corporate governance in 2004 as "some responsibilities and methods applied by the board of directors and managers with the goal of clarifying the strategic path which guarantees access to goals, controls the risks and helps use the resources responsibly". Tery Gray (1984) asserts that corporate governance does not merely have to do with handling the company's operation; it also has to do with direction, monitoring and control of the executive managers' actions and their accountability to all the beneficiaries of the company. Maginson (1994) is another scholar who defines corporate governance as a set of rules, regulations, institutions and methods that determine how and to the interest of whom the companies are managed. More extensive definitions of corporate governance stress wider accountability toward shareholders and other beneficiaries and show that companies have accountability toward the whole society, the next generations and the natural resources. According to this viewpoint, corporate governance system consists of internal and external barriers and balance leverages which guarantee that they accomplish their accountability toward all beneficiaries and act responsibly in all fields of business activity. The logical reasoning in this viewpoint is that the shareholders' interests can be fulfilled only through considering the beneficiaries' interests. There are as many systems of corporate governance as there are countries in the world. The corporate governance system in any country is characterized by a number of internal factors such as the structure of corporate ownership, the economic status, legal system, the government policies and the culture. Ownership structure and legal framework are the most important and determining factors of corporate governance system. External factors such as the rate of capital flow from outside to inside, the status of the global economy, the supply of shares in the market of the other countries and institutional cross-border investment affect the corporate governance system of a country. The efforts made for classification of the corporate governance systems have always faced some problems. However, one of the best known classifications is their division into internal systems and external systems which has more popularity among scholars. The characteristics of these two system types have been shown in table 1. 0

3 Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 Table 1: Characteristics of the Internal and External Systems of Corporate Governance Firm performance External Large companies are controlled by managers but owned by external stakeholders. The system has the feature of separation of ownership and control (management) which causes important agency problems. Hostile takeover does exist as a disciplinary mechanism for the company's manager. Ownership is not concentrated. Control by a large group of stakeholders Lack of transfer of wealth from the minoritygroup shareholders to the majority-group shareholders The strong support of investors in the firm's law The possibility of democracy among shareholders Shareholders have the feature of exit strategy rather than comment strategy. Internal (Relational) Companies are owned by internal stakeholders who also have control over managers. Systems with features of inseparability of ownership and control (management) such that agency problems are rarely found. Hostile takeover is rarely found. Concentration of ownership in a small group of shareholders (the founding members, parent company, state ownership) Too much control of a small group of internal stakeholders Transfer of wealth from the minority-group shareholders to the majority-group shareholders The poor support of investors in the firm's law The possibility of abuse of power by the majority - group shareholders The majority of shareholders tend to have the right to comment in the companies where they have invested. In competitive environments, managers should direct the corporate affairs consciously toward the desired goals and strategies of the organization using the performance measurement process. Success in this process depends on continuous assessment and evaluation and continuous improvement of organizational performance and its elements. Due to the rapid changes and increase in the organizations and companies' power and capabilities of competition in today's world, the favorableness rate of each performance of an organization can be very important for managers as the criterion for assessing the organization's success, Aldrich Howard (1994). Therefore, it is important for managers, executives, experts of organizations and industries and researchers to be familiar with the important criteria of performance evaluation and its indices so that they can assess and evaluate the present status of the strategic plans of their organization and examine the performance of its working elements and take measures to promote and improve their efficiency and effectiveness (Davis Blake, 1998). The performance evaluation of many companies and organizations is done presently based on financial indices. However, their managers and shareholders should notice that a company be profitable with exclusive conditions and non-official communication, whereas it may have an inappropriate status in terms of different levels of efficiency. Therefore, indicators other than financial indices should be considered in order to be able to examine and make conclusion about the production of goods and services from the point of view of efficiency of the factors of production, quality, added value and customer satisfaction (James Hunt, 1991). The Criteria for Evaluation of the Financial Performance of Companies The criteria for measuring firm performance can be divided into two categories of accounting and economic criteria with regard to the accounting and economic concepts. The accounting criteria of performance evaluation are: earnings, profit growth, dividends, cash flows, earnings per share and financial ratios including Return on Asset (ROA), Return on Equity (ROE), the ratio of market share to the book value of the share and Tobin's q ratio. The economic criteria of performance evaluation are: Economic Value Added (EVA), market value added and adjusted economic value added (Jahankhani & Sajadi, 1995). Furthermore, the accounting criteria are divided into two categories. The first category is based on accounting information and the second category is based on accounting information and market information (Jahankhani & Sajadi, 1995). 0

4 Evaluation of the Impact of Corporate Governance The criteria based on accounting information Firm performance is mainly measured using the historical information available in the financial statements and notes. These criteria include earnings, earnings per share, growth rate of earnings, dividends, free cash flow, return on equity and return on assets (Jahankhani & Sajadi, 1995). Earnings Accounting earning refers to incomes minus expenses. A company earns incomes during a fiscal year based on the activities that ir does. However, the company has to have some costs in order to produce goods or provide services. At the end of the fiscal year, the incomes and expenses of the company are weighted and matched and the company's earnings during the year is calculated. Therefore, earning can be a way of evaluating firm performance (Jahankhani & Zariffard, 1995).Burgstahler and Dichev (1997) concluded from their research that earnings management is more common in companies with various shareholders than in those with major shareholders. Bbb (2002) measured performance based on the amount of change in production, concluding that the amount of production has a relation with earnings management. Tang and Chang (201) did a research on Taiwanese companies using regression model. Dividing the companies into strong companies and weak ones in terms of firm performance, they investigated the relationship between earnings management and the financial performance of the companies. The results of their research indicated that discretionary accruals and current discretionary accruals have a significant negative effect on return on assets and Tobin's q in the companies with weak corporate governance. The research results also revealed that current discretionary accruals have a significant positive relationship with firm performance in the companies with strong corporate governance. Moradi (2007) studied the controlling role of the institutional ownership on the reported earning quality. His research showed that there was a positive relation between the level of institutional ownership and earning quality. Moradzadeh et al. (2009) investigated the relationship between earnings management and institutional ownership of the companies listed in Tehran Stock Exchange, coming to the conclusion that there exists a significant negative relationship between institutional ownership level and earnings management. Aghaei and Chalaki (2010) studied the relationship between the characteristics of corporate governance and earnings management in the companies listed in Tehran Stock Exchange. Their research findings reveal that there is a significant negative relation between institutional ownership and earnings management, and between independence of the board and earnings management. Moreover, it was shown that there is no significant relationship between the other features of corporate governance (concentration of ownership, the managing director's influence, dual roles of CEO, the size of the board of directors, reliance on liabilities and the managing director's period of accountability in the board of directors) and earnings management. With regard to the theoretical fundamentals of the research and the studies having been conducted in this regard, we formulate the research hypotheses as follow: Research Hypotheses Main Hypotheses There is a significant relationship between earnings management and performance. The corporate governance mechanisms affect the relationship between earnings management and performance The Research Sub-Hypotheses Independence of the board of directors affects the relationship between earnings management and performance The existence of a manager with dual roles affects the relationship between earnings management and performance The existence of institutional shareholders affects the relationship between earnings management and performance The existence of controlling shareholders affects the relationship between earnings management and performance The existence of audit committee affects the relationship between earnings management and performance Research Methodology This research is an applied research in terms of purpose, and a librarian one in terms of method and nature. In order to collect information on the theoretical fundamentals and literature of the research, we have used librarian sources, articles, the Worldwide Web and the organizational data and reports published by the 09

5 Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 companies listed in Tehran Stock Exchange through the audited financial statements of the companies listed in the official website of Tehran Stock Exchange as well as the Software of Rahavard Novin. The Population and Sample The population of the present research includes all of the companies listed in Tehran Stock Exchange with the following defined conditions: Their financial period should end in Esfand and they should not have changed their financial period over the past years. The information regarding the quarterly financial statements should be available. They should not be active in financial intermediation industry The Research s Independent s Considering the main question of the research and based on the studies, the independent variable of the research is earnings management whose effect on dependent variables is assessed. Dependent s Financial performance The dependent variable in the present research if financial performance, and the following criteria have been used to measure it: Return on Asset (ROA): Rate of ROA is one of the financial ratios obtained by dividing the net profit plus the interest cost into the sum of assets. ROA is related to the companies' skills of production and sales and is not influenced by their financial structure. ROA is calculated in the following way: Tobin's q Ratio: Tobin's q ratio is obtained by dividing the company's market value into the book value or replacement value of the assets of the company. If the calculated Tobin's q index for a company is greater than I, there is a high motivation for investment. In other words, a high Tobin's q normally shows high chances of growth. If Tobin's q is smaller than 1, the investment is stopped. If the company makes use of all opportunities of investment, the final value of Tobin's q will reach 1. The Moderator s Moderator variables are qualitative or quantitative variables which influence either the direction of or the rate of the relationship between the independent variables and the dependent ones. The moderator variables of this research are corporate governance mechanisms as follow: The board of directors' independence: The board of directors' independence include mandatory and nonmandatory members, so that the board of directors' independence will be higher if the non-mandatory members constitute a higher percentage of the board. The board of directors' independence is the ratio of the non-mandatory members to the total members of the board of directors Dual roles of CEO: from the perspective of the corporate governance mechanisms, the existence of a managing director with dual roles is considered a negative point for the company. Dual roles means that the managing director is the head or the assistant head of the board of directors in addition to his position. Companies with dual-accountability managing directors receive zero and those without them receive 1 in this research.the Existence of Institutional shareholders: institutional shareholders are shareholders who are members of banks, insurances, financial institutions, Holding Companies, retirement funds and investment funds, and public organizations and companies. As they have adequate opportunities, resources, experience of investment and ability of financial analysis, they can have positive influence on the management's performance and can have a better control over the board of directors' activities. This is why they have been regarded as mechanisms of corporate governance in this research.controlling shareholders: A controlling shareholder is a shareholder who owns more than 50 percent of the shares of a company. Due to the ability to control and influence the board of directors' decisions, this shareholder can also be important and effective in the performance of the company. Companies with controlling shareholders have received 1 and those without them have received 0 in this research. 00

6 Number of observations Jarque-Bera Statistic probability Jarque-Bera Statistic Standard deviation Minimum number Maximum number Mode Median Evaluation of the Impact of Corporate Governance Audit Committee: It is assumed that audit committee, as an independent committee, can have positive impact on the board of directors' decisions and prevents them from making decisions of their own interest. Companies with audit committee have received 1 and those without it have received 0 in this research. Control s It is impossible in a research to study the effects of all variables on one another simultaneously. This is why the researcher controls the effects of some variables and neutralizes them. The difference between a moderator variable and a control variable is that the researcher measures the effect of the moderator variable, but removes the effect of the control variable. The control variables in this research are: company size and financial leverage. Data Analysis Method and Testing the Hypotheses We have used descriptive statistics, inferential statistics and Eviews Software in order to analyze the data and test the research hypotheses. We have used descriptive statistics, particularly central indices such as mode, median and dispersion indices such as standard deviation, skew and kurtosis in order to describe the variables and the data distribution type. We have also used inferential statistics in two parts.the Default Regression Model Test: including tests showing the normality of the population distribution (Kolmogrov- Smirnov Test) and tests showing non-autocorrelation of the data (Durbin-Watson Test). Main Test: including One-variable Linear Regression Test and Pearson Correlation Test. The Research Findings We examine research variables summarily in table 2 before dealing with the research hypotheses. This table includes indices to describe the research variables. Table 2: Descriptive Statistics Audit committee Controlling shareholder Earnings management discretionary accruals Dual roles of CEO Independence of the directing board Institutional shareholder Financial leverage Tobin's q Return on Asset (ROA) Company size All these indices try to show the layout of the data. Jarque-Bera Statistic is particularly important and shows data normality. If the statistical probability is more than 5 percent, the normality of the variables is confirmed; otherwise, the data are not normal and should be normalized so that other tests can be used 0

7 Tobin's q ROA Existence of Audit Committee Dual roles of CEO Independence of the directing board Controlling ownership Institutional ownership Earnings management Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 subsequently. As shown in the descriptive statistics table, the statistical probability for all variables is less than 5 percent, which shows that the variables are not normal. Correlation among variables Before testing the research hypotheses, we first examine the correlation among the variables to see how and to what extent they are correlated. This test will help the researcher to find the linear relations among variables before using any other test. Earnings management Institutional ownership Controlling ownership Independenc e of the directing board Dual roles of CEO Existence of Audit Committee Return on Asset ROA)) Tobin's q Table shows the correlation among the research variables at level of 5 % error. If the error percentage is less than 5 percent, the coefficient will be significant, but if it is more than 5 percent, the coefficient is insignificant. Among the coefficients obtained and shown in the above table, it has been shown that there is a significant correlation with coefficient of between the variables of "Tobin's q" and "earnings management", such that earnings management has been able to change the company's Tobin's q up to 52 percent. In other words, earnings management can explain the company's changes of Tobin's q up to 52 percent. There are also significant correlations between variables such as Tobin's q and institutional ownership, Tobin's q and the board of directors' independence, ROA and dual roles of CEO. Analyzing and Testing the Hypotheses: H0 and H1 are stated in the following: H0: There is no significant model. H1: There is significant model. As the data used in this research are tabular data, they demand special stages for tests. The model estimation using tabular data generally includes the following stages: Examining the reliability of the data Model estimability test in the form of tabular data Determining fixed effects or random effects Estimation of parameters 0

8 Evaluation of the Impact of Corporate Governance Examining the s' Reliability We used tests such as LLC, ISP, PP and ADF to examine the reliability of the research variables. We have also used Augmented Dickey-Fuller (ADF) Test which is one of the most important unit root tests. The variables' reliability has been shown in table 2-4. Table 4: Augmented Dickey-Fuller Test, Testing the Reliability of the s Augmented Dickey-Fuller Test for the reliability of the variables of the hypotheses Statistic Statistical probability Independence of the directing board Dual roles of CEO Existence of institutional shareholder Existence of controlling shareholder Existence of Audit Committee Return on Asset (ROA) Tobin's q Table 4 shows the results of Dickey-Fuller Test for reliability of the research variables, as reliability is one of the basic assumptions of panel data tests. The statistic probability for most of the variables is greater than 5 percent, as shown in the table above. This indicates that almost no variable is reliable (except for dual roles of CEO and controlling shareholder). In order to prepare the variables for administration of F-Limer Test and Hausman Test for panel data, the variables should be made reliable. For this purpose, we administer Dickey-Fuller Test on the data once again with one stage of taking differences. The outputs are shown in table 5. Table 5: ADF Test with one Stage of Taking Differences Augmented Dickey-Fuller Test for the reliability of the variables of the hypotheses Statistic Statistical probability Independence of the directing board Dual roles of CEO Existence of institutional shareholder Existence of controlling shareholder Existence of Audit Committee Return on Asset (ROA) Tobin's q The table shows that the statistical probability is less than 5 percent; hence the data are reliable enough. Therefore, everything is ready for administration of the next tests to choose the appropriate regression model: Chow F-Test to Choose or Fixed Y-Intercept We used F-Limer Test (Chow Test) to test the common fixed value, i.e. homogeneity of different stages. The results of the above test have been shown in table 6. Hypotheses are introduced in Chow Test in the following way: H0: the y-intercepts of the model are equal = panel data model H1: the y-intercepts of the model differ from a sample to another = fixed effect model 0

9 Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 Table 6: F-Limer Test of the Hypotheses Hypothesis Test type Statistic value Statistical probability Result The 1st main hypothesis return on assets earnings management The 1st main hypothesis (Tobin's q- earnings management) The first sub-hypothesis (return on assets the board of directors' independence) The first sub-hypothesis (the board of directors' independence robin's q) The second sub-hypothesis (dual roles of ceo return on assets) The second sub-hypothesis (dual roles of ceo Tobin s q) The third sub-hypothesis (institutional shareholder return on assets) The third sub-hypothesis (institutional shareholder Tobin s q) The fourth sub-hypothesis (controlling shareholder return on assets) The fourth sub-hypothesis (controlling shareholder Tobin s q) The fifth sub-hypothesis (audit committee return on assets) The fifth sub-hypothesis (audit committee Tobin s q) F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test F-test (lamer) H0 is rejected and fixed effects Chi-square test In all of these hypotheses, the Pool model which is panel data model has been rejected and the fixed effect model has been selected. The results of table 6 are related to Chow Test of F-Limer Test, which shows model estimation in the form of tabular data. The results of this test show whether to use Pool Model or 0

10 Evaluation of the Impact of Corporate Governance Fixed Effect Model. It rejects the use of panel data model. After this, tabular data should be used and Hausman Test should be used then in order to help determine the type of tabular data. Therefore, we administer Hausman Test for all of the hypotheses. The results of this test have been shown in table 7. Table 7: Hausman Test of the Hypotheses Hypotheses Test type Statistic value The first main hypothesis (earnings Chi-Square Test 2.62 management return on assets) The first main hypothesis (earnings Chi-Square Test 42.7 management Tobin's q) The first sub-hypothesis ( Tobin s q the Chi-Square Test board of directors' independence) The second sub-hypothesis (dual roles of the Chi-Square Test 1.19 board of directors return on assets) The second sub-hypothesis (dual roles of the Chi-Square Test 1.17 board of directors Tobin's q) The third sub-hypothesis(institutional Chi-Square Test shareholder return on assets) The third s sub-hypothesis(institutional Chi-Square Test shareholder Tobin's q) The fourth sub-hypothesis(controlling Chi-Square Test shareholder return on assets) The fourth sub-hypothesis(controlling Chi-Square Test shareholder Tobin's q) The fifth sub-hypothesis(audit committee Chi-Square Test 1.07 return on assets) The fifth sub-hypothesis(audit committee - Chi-Square Test Tobin's q) Degree of freedom Statistical probability Based on the values obtained, since Hausman statistic probability is less than the significance level of 5 percent, there is no adequate reason to reject the fixed effect model. This is why we use this model to test the related hypothesis. Testing the Research Hypotheses: After testing the reliability of the variables and determining the type of the fixed effect model instead of the random effect model, we show the estimation of regression model coefficients in the following tables: 0 Table 8: Testing the first main hypothesis

11 Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 Return on Asset ROAResults of testing the first main hypothesis Fixed number Earnings management Company size Financial leverage Adjusted coefficient of determination (Tobin's q)results of testing the first main hypothesis Fixed number Earnings management Financial leverage Company size Adjusted coefficient of determination T statistic statistic F probability F T-statistic statistic F probability F Table 8 shows two separate outputs for the first main hypothesis. The first output is related to testing the relationship between return on assets and earnings management. According to the results, the t-statistic related to earnings management shows that there is no significant linear relation between return on assets and earnings management, and the control variable of company size has been able to establish a significant relation with return on assets as the negative coefficient of 5 for company size show that the return on assets has decreased as the company size has increased. The second output is related to testing the first main hypothesis with the variables of earnings management and Tobin's q. the results show that there is a significant relation between earnings management and Tobin's q with a margin of error of 5%. There is a strong positive relation of 47% between the two variables, meaning that with a change of one unit in earnings management, 47% change will occur in Tobin's q. in this model, the two control variables of company size and financial leverage also have a significant relation with Tobin's q with a margin of error of 5%. The coefficients of these two variables show that an increase in company size will lead to a decrease in the company's Tobin's q, and an increase in the company's financial leverage will result in an increase in the company's Tobin's q. The next outputs enter each one of the corporate governance mechanisms to examine its effect on the value of a company and to see how the value of a company is related with earnings management: 02

12 Evaluation of the Impact of Corporate Governance Table 9: Testing the First Sub-Hypothesis Return on Asset ROA Results of testing the 1st sub-hypothesis Fixed number Earnings management Independence of the board Company size Financial leverage Adjusted coefficient of determination Durbin - Watson statistic Tobin's q Results of testing the first sub-hypothesis Fixed number Earnings management Independence of the board Financial leverage Company size Adjusted coefficient of determination T statistic statistic F F probability F T statistic F Statistic F Probability Table 9 shows the results of testing the first sub-hypothesis. In this hypothesis, the independence of the board of directors has entered the model as a moderator variable so that its effect on the relationship between the indices of firm performance and earnings management can be examined. The first output is related to testing the relationship between return on assets and earnings management. According to the results, the t-statistic related to earnings management shows that there is no significant linear relation between return on assets and earnings management, and the control variable of company size has been able to establish a significant relation with return on assets as the negative coefficient of 52 for company size show that the return on assets has decreased as the company size has increased. The variable of the independence of the board of directors cannot be placed in the model because of the t-statistic which is less than 5%. Thus it has no linear relation with return on assets in order to compare the effect of the moderator variables, the changes that have occurred with the arrival of the moderator variables have been shown in table The second output of table (4-7) is related to testing the first main sub-hypothesis with the variables of earnings management and Tobin's q. The results show that there is a significant linear relation between earnings management and Tobin's q with a margin of error of 5%. The negative coefficient of 51percent shows a negative relation between earnings management and Tobin's q, such that the company's Tobin's q will decrease with an increase in earnings management. The variable of the board of directors' independence has no significant coefficients with a margin of error of 5%, but there is a significant positive relationship between Tobin's q and the board of directors' independence if the level of significance is considered 6 percent. This relationship shows that with an increase in the board of directors' independence, the company's Tobin's q will also increase.

13 Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 Table 10: Testing the Second Sub-Hypothesis The results of testing the 2nd sub-hypothesis (ROA) T-statistic Fixed number earnings management Directing manager's dual responsibilities Financial leverage Company size F-statistic Adjusted coefficient of determination F- probability 00 1, Tobin's q Results of testing the second sub-hypothesis T statistic Fixed number Earnings management Dual roles of CEO Financial leverage Company size F Statistic Adjusted coefficient of determination F Probability Table 10 shows the results of testing the second sub-hypothesis.. In this hypothesis, the dual responsibility of the board of directors has entered the model as a moderator variable so that its effect on the relationship between the indices of firm performance and earnings management can be examined. The first output of table 94-8) shows that there is no significant relationship between earnings management and return on assets, nor is there any significant relationship between dual roles of CEO and return on assets with a margin of error of 5%. However, there is a significant relationship between these two variables with a margin of error of 10%. The effect of the arrival of dual roles of CEO has been shown in table (4-12). The second output of table (4-8) is related to testing the second sub-hypothesis with the variables of earnings management and Tobin's q. The results show that there is a significant linear relationship between earnings management and Tobin's q with a margin of error of 5%, such that the company's Tobin's q will decrease as the earnings management increases. The variable of dual roles of CEO has no significant relation with Tobin's q at the levels of error of 5% and 10%.

14 Evaluation of the Impact of Corporate Governance Table 11: Testing the Third Sub-Hypothesis Return on Asset ROA Results of testing the third sub-hypothesis T statistic Fixed number Earnings management Institutional shareholder Financial leverage Company size F Statistic Adjusted coefficient of determination F Probability Tobin's q)results of testing the third sub-hypothesis T statistic Fixed number Earnings management Institutional shareholder Financial leverage Company size F Statistic Adjusted coefficient of determination F Probability Table 11 shows the results of testing the third sub-hypothesis.. In this hypothesis, the variable of institutional shareholder has entered the model as a moderator variable so that its effect on the relationship between the indices of firm performance and earnings management can be examined. The first output of table (4-9) shows that there is no significant relationship between institutional shareholder and return on assets with a margin of error of 5%. However, with regard to the t-statistic which is equal to 0.087, it becomes clear that this relationship is significant with a margin of error of 10%. The second output of table (4-9) is related to testing the third sub-hypothesis for the variables of institutional shareholder, earnings management and Tobin's q. the t-statistic shows that there is a strong significant positive relationship between earnings management and Tobin's q, and institutional shareholder has a sig' relation with Tobin's q at the lkevel of error of 5%: 9

15 Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 Table 12: Testing the Fourth Sub-Hypothesis Return on Asset ROA Results of testing the fourth sub-hypothesis T statistic Fixed number Earnings management Controlling shareholder Financial leverage Company size F Statistic Adjusted coefficient of determination F Probability Tobin's q Results of testing the fourth sub-hypothesis T statistic Fixed number Earnings management Controlling shareholder Financial leverage Company size statistic F Adjusted coefficient of determination probability F Table 12 shows the results of the fourth sub-hypothesis of the research. The variable "controlling shareholder" has arrived at the model as a moderator variable so that its effect on the relation between firm performance and earnings management can be examined. The first output of table 12 shows that there is no significant relation between earnings management and ROA, but that there is a significant relation between controlling shareholder and ROA with a margin of error of 5%. The second output of table (4-10) is related to testing the fourth sub-hypothesis for the variables of controlling shareholder, earnings management and Tobin's q. s T-statistic shows that there is a positive significant relation between earnings management and Tobin's q, but there is no significant relation between controlling shareholder and Tobin's q with a margin of error of 5%. 0

16 Evaluation of the Impact of Corporate Governance Table 1: Testing Fifth Sub-Hypothesis ROA Results of testing sub-hypothesis 5 Fixed Number Earnings Management Audit Committee Financial Leverage Company Size Adjusted coefficient of determination Tobin's q Results of testing sub-hypothesis 5 variable fixed number earnings management Audit Committee financial leverage company size Adjusted coefficient of determination coefficients T statistic F statistic probability F T statistic statistic F probability F Table 1 shows the results of testing the fifth sub-hypothesis. In this hypothesis, the variable of "audit committee" has interfered with the model as a moderator variable so that its effect on the relation between firm performance and earnings management can be investigated and assessed. The first output of table 1 is related to testing the relation between ROA (one of the indices of value of a company) and earnings management with the moderator variable of audit committee. Results reveal that both earnings management and audit committee have no significant relation with ROA with a margin of error of 5%, but audit committee has a significant linear relation with ROA with a margin of error of 10% (with regard to its t-statistic which is equal to 0.08). The second output of table 1 shows the relationship between earnings management and audit committee in terms of another index of financial performance called Tobin's q. The outputs of t-statistic show that earnings management has maintained its positive significant relation with Tobin's q with a margin of error of 5% but audit committee has no significant relation with Tobin's q with a margin of error of 5%. We have shown the coefficients of earnings management and ROA and Tobin's q before and after the interference of the mechanisms in order to have a better comparison and a more complete understanding of the mechanisms of corporate governance:

17 Jurnal UMP Social Sciences and Technology Management Vol., Issue.,2015 Table 14: A Comparison of Earnings Management before and After the Moderator s Dependent variable Mechanisms of corporate governance Return on Asset (ROA) Earnings managemen t coefficient before interference of corporate governance mechanism Earnings managemen t coefficient after interference of corporate governance mechanism The board of directors' independence Dual roles of CEO institutional shareholder controlling shareholder Audit Committee Difference between coefficients Tobin's q independence of the directing board dual roles of CEO institutional shareholder controlling shareholder Audit Committee Conclusion and Discussion The results of statistical analyses of the first hypothesis showed that there is a significant relation between earnings management and the performance As the variable of value of a company is calculated in this research as the dependent variable through ROA and Tobin's q, thus the first main hypothesis is changed into the second hypothesis, dealing with the relation between earnings management and ROA as well as between earnings management and Tobin's q. The results of testing the relation between ROA (an index assessing the value of a company) and earnings management show that there is no significant linear relation between ROA and earnings management. The results of testing the first main hypothesis with variables of eagerly and Tobin's q show that there is a significant relation with a margin of error of 5% between the two variables, that is, there is a strong positive relation of 47% between them, meaning that with a change of one unit in earnings management, 47% change will occur in Tobin's q. In order to test the second hypothesis assuming the effect of corporate governance mechanisms on the relation between earnings management and value of a company, the effect of corporate governance mechanisms on the relation between them was examined one by one. The outputs showed that mechanisms such as dual roles of CEO and institutional shareholder have a positive significant effect on company's Tobin's q with a margin of error of 7%, such that this relation is equal to 80 percent. The directing board, as a part of corporate governance, is considered the most important factor in controlling the management and supporting the shareholders' interests. Dual roles of CEO and institutional shareholder also have a negative significant relation with ROA with a margin of error of 10%. Institutional shareholder has a negative significant relation with Tobin's q with a margin of error of 5% and controlling shareholder has a positive significant relation with ROA. The result of the sub-hypotheses of the second main hypothesis shows that the mechanisms of corporate governance have a large influence on the value of

18 Evaluation of the Impact of Corporate Governance a company and can fluctuate it easily. The implication is that there should be a kind of moderation in the mechanisms of corporate governance so that the company can utilize such mechanisms. Results reveal that the existence of audit control has a positive effect on the relation between earnings management and ROA and a negative effect on the relation between earnings management and Tobin's q. However, as the present research aims at investigating the effect of corporate governance mechanisms on the relationship between earnings management and value of a company, the coefficients of earnings management should be examined before and after the arrival of the mechanisms, showing that the mechanisms of corporate governance have been able to have a great impact on earnings management coefficients. A comparison of the coefficients before and after the interference of the corporate governance mechanisms show that controlling shareholder has no effect on the relationship between earnings management and Tobin's q, meaning that existence or lack of controlling shareholder does not influence the relationship between them. However, the board of directors' independence increases the positive relationship between earnings management and Tobin's q and decreases the negative relation between earnings management and ROA. In other words, the board of directors' independence has a positive effect on the relation between earnings management and value of a company and makes this relation positive. In other words, there is a more positive and stronger relation between earnings management and value of a company in companies with highly independent board of directors than companies with low independence of board of directors. Put it simply, in companies with high performance, the higher the independence of the board of directors, the higher the earnings management will be. It could be expected that an increase in the board's independence will decrease the intensity of the relation between firm performance and earnings management. However, a quite reverse result has been obtained. Dual roles of CEO, institutional shareholder, controlling shareholder and audit committee also have a positive effect on the relation between earnings management and ROA. In other words, those companies which observe the corporate governance mechanisms such as dual roles of CEO, institutional shareholder, controlling shareholder and audit committee have a positive strong relation between earnings management and ROA in comparison with the companies which do not. On the other hand, mechanisms such as dual roles of CEO, institutional shareholder, controlling shareholder and audit committee affect the relation between earnings management and Tobin's q, but the influence is negative rather than positive. In other words, companies which observe corporate governance mechanisms including dual roles of CEO, institutional shareholder, controlling shareholder and audit committee in their governance system affect the relation between earnings management and Tobin's q negatively.in testing the first and second hypotheses, control variables such as company size and financial leverage have also had an important effect on the value of a company, such that the results show that the variable of company size has had a negative significant effect on ROA and a positive significant effect on Tobin's q. the variable of financial leverage has had a negative significant effect on Tobin's q. These results show that as the company gets larger, it will make less optimal use of its assets. However, the use of debts also influences the company's index of Tobin's q and has a negative relation with it, such that as the company's debts have increased, its Tobin's q has decreased.regarding the relation between earnings management and firm performance, the results of the studies conducted by Khodadadi and Jan Jani (2011) show that those companies which have had earnings management have had more profit before tax and more net profit of growth. Thud, firm performance has a positive significant relation with earnings management. The results of the present research show that there is no significant relationship between ROA and earnings management, but there is a positive significant relationship between earnings management and Tobin's q with a margin of error of 5%, which approve of the results of the previous research. Furthermore, the studies conducted by Aref Mahdavi Ardakani, Nejat Yosofi and Mohammad Hashemijou (2010) reported a negative relationship between earnings management and the Malaysian companies' performance, which are exactly the reverse of the findings of the present research. The results of the studies conducted by Tang and Chang (201) on Taiwanese companies show that discretionary accruals and current discretionary accruals have a negative significant effect on ROA and Tobin's q in companies with poor corporate governance. The results of this research also showed that current discretionary accruals has a positive significant relation with firm performance in the companies with strong corporate governance and the present research also shows that different mechanisms of corporate governance affect this relationship differently.finally, with