Does Good Corporate Governance Improve Earnings Quality?

Abstract

<p>In this paper, we examine the relationship between corporate governance and earnings quality. For earnings quality, we use two measures which are based on the modified Jones model (1995) and the Dechow-Dichev model (2002), respectively. Then we extract three factors from seven corporate governance variables by using principal components analysis. Using ordinary least squares (OLS) regressions and sensitivity tests, we find that firms with more independent boards and more efficient board structures have higher earnings quality. The results also indicate that larger firms and firms with higher return on assets have better earnings quality.</p>