The influence of corporate governance mechanisms and employee stock options on accretive share buyback in Malaysia

In recent decades, there has been a notable and growing practice of real earnings management practiced through accretive share buybacks. Corporate governance is recognised as a significance mechanism in confirming the credibility of financial reporting quality. Overall, this study examines accretive share buybacks as a mechanism for real earnings management. The objectives of this study are to investigate the influence of corporate governance mechanisms: board of directors (BOD) effectiveness (independence, size, meetings and financial expertise), audit committee (AC) effectiveness (independence, size, meetings and financial expertise), audit quality and ownership structure (family, managerial, foreign) on accretive share buybacks. Considering the stock options hypothesis, this study also investigates the impact of employee stock options (ESOS) on accretive share buybacks. The study utilised 235 firm-year observations of non-financial firms listed on the Bursa Malaysia that were involved in accretive share buybacks over the years 2010 to 2015. By using panel data, the findings of the main analysis indicate that AC effectiveness and family ownership was negatively related to accretive share buybacks, but the effectiveness of the BOD and audit quality was positively associated with accretive share buybacks. The findings also show that ESOS were positively related to the accretive share buybacks, and no relationship was revealed between managerial ownership and foreign ownership with accretive share buybacks. The unexpected result of BOD effectiveness revealed the negative role of concentrated ownership in the monitoring functions of the BOD. This study contributes to a better understanding of corporate governance practices and accretive share buyback activities by Malaysian listed firms. The results indicate that firms should improve the effectiveness of corporate governance mechanisms (BOD, AC, audit quality and ownership structure) to enhance financial reporting quality. Hopefully, this study will provide a reference point for relevant parties to improve the applicable regulations and corporate governance schemes.