Governance monitoring costs, audit committee quality, ownership concentration and real earnings management in Malaysia

Real earnings management (REM) has attracted much attention recently as an alternative technique of earnings management that may affect company performance. This study examines the effect of governance monitoring and ownership concentration on REM by manufacturing companies listed in the Main Market of Bursa Malaysia, a country that is characterised by high ownership concentration and weak corporate governance. Specific attention is given to the role of investment in governance monitoring. Data are from 1,056 firm-year observations for the period 2013 to 2016,
following the revision of code of corporate governance in Malaysia in 2012. Random effects regression was used for testing the hypotheses based on the Breusch and Pagan Lagrange multiplier test and Hausman test results. The result shows a significant
negative relationship between non-executive directors’ remuneration, investment in internal audit function, audit fees, the aggregate of governance monitoring costs, and REM practices in Malaysian manufacturing companies. The findings indicate that audit committee size, independence, financial expertise, chair accounting expertise, and audit committee score do not constrain REM. Family ownership concentration is negatively and significantly associated with REM, implying that family shareholders tend to align the majority-minority interests and protect shareholders' wealth. However, managerial and foreign substantial shareholders are not associated with REM, suggesting that different controlling shareholders have different effect on REM. Finally, the study reveals that family ownership concentration does not interact with governance monitoring costs to influence REM. The results are robust under various additional analyses and model estimations, and have implications for policymakers (such as Securities Commission), investors, directors of companies and other market participants in restraining REM practices.