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Universlti Utara Malaysia


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Tunjuk Lagi ( halaman)



Universlti Utara Malaysia

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September 2019


Universlti Utara Malaysia





Thesis Submitted to

Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia,


Universlti Utara Malaysia




Universlti Utara Malaysia


Universlti Utara Malaysia



In presenting this thesis in fulfillment of the requirements for a postgraduate degree from the Universiti Utara Malaysia (UUM), I agree that the Library of this university may make it freely available for inspection. I further agree that permission for copying this thesis in any manner, in whole or in part, for scholarly purposes may be granted by my supervisor or in their absence, by the Dean of Tunku Puteri Intan Safinaz School of Accountancy where I did my thesis. It is understood that any copying or publication or use of this thesis or parts of it for financial gain shall not be allowed without my written permission. It is also understood that due recognition given to me and to the UUM in any scholarly use which may be made of any material in my thesis.

Request for permission to copy or to make other use of materials in this thesis in whole or in part should be addressed to:

Dean of Tunku Puteri Intan Safinaz School of Accountancy Universiti Utara Malaysia

06010 UUM Sintok Kedah Darul Aman


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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.

Keywords: real earnings management, governance monitoring costs, ownership concentration, audit committee quality, Malaysia


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Pengurusan pendapatan sebenar (REM) telah menarik perhatian baru-baru ini sebagai teknik alternatif pengurusan pendapatan yang boleh mempengaruhi prestasi syarikat.

Kajian ini meneliti kesan pemantauan tadbir urus dan tumpuan pemilikan terhadap REM oleh syarikat pembuatan yang tersenarai di Pasaran Utama Bursa Malaysia, sebuah negara yang disifatkan sebagai mempunyai tumpuan pemilikan yang tinggi dan tadbir urus korporat yang lemah. Perhatian khusus diberikan kepada peranan pelaburan dalam pemantauan tadbir urus. Data adalah dari 1,056 pemerhatian syarikat untuk tempoh dari tahun 2013 hingga 2016, empat tahun selepas semakan tadbir urus korporat di Malaysia pada tahun 2012. Regresi kesan rawak digunakan untuk menguji hipotesis berdasarkan ujian pengganda Breusch dan Pagan Lagrange dan keputusan ujian Hausman. Hasil kajian menunjukkan hubungan negatif yang signifikan antara imbuhan pengarah bukan eksekutif, pelaburan dalam fungsi audit dalaman, fi audit, agregat kos pemantauan tadbir urus, dan amalan REM di syarikat-syarikat tersenarai di Malaysia.

Penemuan kajian menunjukkan bahawa saiz jawatankuasa audit, kebebasan, kepakaran kewangan, kepakaran pengerusi jawatankuasa audit, dan skor jawatankuasa audit tidak mengekang REM. Tumpuan pemilikan keluarga berkait secara negatif dan signifikan dengan REM, yang menyiratkan bahawa pemegang saham keluarga cenderung untuk mengekalkan kepentingan pemegang saham majoriti dan minoriti dan menjaga kekayaan pemegang saham. Walau bagaimanapun, pemegang saham utama pengurusan dan asing tidak dikaitkan dengan REM. Akhirnya, kajian itu mendedahkan bahawa tumpuan pemilikan keluarga tidak berinteraksi dengan kos pemantauan tadbir urus untuk mempengaruhi REM. Dapatan kajian ini mantap berdasarkan pelbagai analisis tambahan dan anggaran model yang dijalankan, dan ia mempunyai implikasi kepada penggubal dasar (seperti Suruhanjaya Sekuriti), pelabur, pengarah syarikat dan peserta pasaran lain untuk menghalang praktis REM.

Kata kunci: pengurusan pendapatan sebenar, kos pemantauan tadbir urus, tumpuan pemilikan, kualiti jawatankuasa audit, Malaysia


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Alhamdulillah. All praises and thanks are to Almighty Allah. It was a long journey to complete this PhD thesis, and although it took much effort, commitment, time and struggle it has been a real knowledge experience. However, it would have been difficult to complete this work without the invaluable support and encouragement of many people.

First, I would like to express my sincere thanks and appreciation to my wonderful supervisor Assoc. Prof. Dr Hasnah Kamardin for her outstanding guidance, trust, patience and unlimited support, and for the door that was always open from the onset of the research to its completion. I gained much from her in research knowledge as well as human behaviour.

My sincere thanks also go to Assoc. Prof. Dr Rohaida Abdul Latif and Assoc. Prof. Dr Kamarul Bahrain Abdul Manaf for their valuable comments and constructive suggestions during my proposal defence. I also must thank all staff at Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia for being so motivational and so supportive.

I would like to dedicate this study to my dearest parents, my father, Ali, and my mother, Aishah, for everything they have done for me throughout my life. Their continual concern throughout my PhD, their unconditional love, daily dua’a and unlimited support have encouraged me to complete this thesis and make them proud of my achievement.

My heartfelt thanks go to my lovely wife Manar, and my two sweet daughters Layan and Raghad for their never-ending love, sacrifice and patience during my PhD work.

Thank you for supporting me and for providing me with the most suitable environment for success. I would also like to thank my brothers and sisters, and all my family members in Yemen and the golden friends in Malaysia. Special thanks go to my elder brother Tariq Ali, and my dearest friend Abdulbari AL-Qadhi for unlimited support and encouragement.

I greatly appreciate the contribution of the Hodeidah University, Yemen for providing me with financial support for my Master and PhD studies. Lastly, many thanks go to all of my associates, friends and those who contributed to my work in one way or another; may Allah bless you all.


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ABSTRAK ... vii








1.1 Background of the Study ... 1

1.2 REM in Malaysia ... 6

1.3 Problem Statement... 9

1.4 Research Questions ... 18

1.5 Research Objectives ... 19

1.6 Significance of the Study ... 19

1.7 Scope of the Study ... 23

1.8 Organisation of the Study ... 23


2.1 Introduction ... 24

2.2 Malaysian Financial Reporting Environment ... 24

Financial Reporting Environment in Malaysia ... 24 Companies Act 2016 ... 25 Bursa Malaysia ... 26 Securities Commission of Malaysia ... 26 Companies Commission of Malaysia ... 27 Financial Services Act 2013 ... 27 Professional Accounting Bodies ... 28

Corporate Governance Development in Malaysia ... 30

2.3 Earnings Management: Definitions, Motivations and Types ... 35

2.4 REM Background ... 39

REM Techniques ... 41 Sales Manipulation ... 42 Overproduction... 42 Discretionary Expenses ... 43

Consequences of REM Practices ... 45

Empirical Studies on REM ... 46

2.5 Related Theories ... 53

Agency Theory ... 53

Resource Dependence Theory ... 57

2.6 Review of Previous Studies ... 59

Governance Monitoring Costs ... 59 Non-Executive Directors’ Remuneration ... 60


Universlti Utara Malaysia Investment in Internal Audit Function ... 67 Audit Fees ... 70 Governance Monitoring Costs (Aggregate) ... 73

Audit Committee Quality ... 75 Audit Committee Size ... 77 Audit Committee Independence ... 79 Audit Committee Financial Expertise ... 81 Audit Committee Meetings ... 83 Audit Committee Chair’s Accounting Expertise ... 84 Audit Committee Quality (Score) ... 86

Ownership Concentration ... 87 Family Ownership Concentration ... 89 Managerial Ownership Concentration ... 95 Foreign Ownership Concentration ... 98

Moderating Effect of Family Ownership Concentration ... 101

2.7 Summary... 105


3.1 Introduction ... 106

3.2 Research Framework ... 106

3.3 Development of Hypotheses ... 108

Governance Monitoring Costs and REM ... 108 Non-Executive Directors’ Remuneration and REM ... 108 Investment in Internal Audit Function and REM ... 111 Audit Fees and REM ... 112 Governance Monitoring Costs (Aggregate) and REM ... 114

Audit Committee Quality and REM ... 116 Audit Committee Size and REM ... 117 Audit Committee Independence and REM ... 118 Audit Committee Financial Expertise and REM ... 119 Audit Committee Meetings and REM ... 120 Audit Committee Chair’s Accounting Expertise and REM ... 121 Audit Committee Quality and REM ... 122

Ownership Concentration and REM ... 124 Family Ownership Concentration and REM ... 124 Managerial Ownership Concentration and REM ... 126 Foreign Ownership Concentration and REM ... 127

Moderating Effect of Family Ownership Concentration ... 129

3.4 Research Design ... 133

3.5 Sample of Study ... 134

3.6 Data Collection ... 137

3.7 Measurement of Variables ... 138

Measurement of Dependent Variable... 138

Measurements of Independent and Control Variables ... 142 Non-Executive Directors’ Remuneration ... 144 Investment in Internal Audit Function ... 144 Audit Fees ... 144


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xi Audit Committee Independence ... 145 Audit Committee Financial Expertise ... 145 Audit Committee Meetings ... 146 Audit Committee Chair’s Accounting Expertise ... 146 Audit Committee Quality ... 149 Family Ownership Concentration ... 150 Managerial Ownership Concentration ... 151 Foreign Ownership Concentration ... 152 Company Size ... 153 Return on Assets... 153 Leverage ... 154 Company Growth ... 154

3.8 Empirical Research Models ... 155

3.9 Summary... 156


4.1 Introduction ... 157

4.2 Descriptive Statistics ... 157

Descriptive Statistics of REM ... 158

Descriptive Statistics of Independent and Control Variables ... 161

4.3 Univariate Test ... 166

4.4 Correlation Analysis ... 169

4.5 Data Diagnostic Tests ... 173

Outliers ... 173

Normality ... 174

Multicollinearity ... 176

Homoscedasticity ... 177

Autocorrelation ... 178

4.6 Selection of Appropriate Model for the Study ... 179

4.7 Results of the Random Effect Models ... 180

Results of Relationship between Governance Monitoring Cost and REM ... 181 Non-Executive Directors’ Remuneration ... 181 Investment in Internal Audit ... 183 Audit Fees ... 184 Governance Monitoring Costs (Aggregate) ... 185

Results of Relationship between Audit Committee Quality and REM ... 186 Audit Committee Size ... 186 Audit Committee Independence ... 186 Audit Committee Financial Expertise ... 187 Audit Committee Meetings ... 188 Audit Committee Chair’s Accounting Expertise ... 189 Audit Committee Quality ... 190

Results of Relationship between Ownership Concentration and REM ... 191 Family Ownership Concentration ... 191 Managerial Ownership Concentration ... 193 Foreign Ownership Concentration ... 194

Results of Control Variables ... 195

Results of Moderating Effect of Family Ownership Concentration ... 197

4.8 Additional Analysis ... 200


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Alternative Measurement of REM ... 200

Random Effect and OLS Models ... 203

Robustness of Governance Monitoring Costs ... 205

Alternative Measurements for Family Ownership Concentration ... 206

Alternative Measurements for Managerial Ownership Concentration ... 208

Additional Test to Check Correlation Issue ... 210

4.9 Summary... 210


5.1 Introduction ... 213

5.2 Summary of the Study ... 214

5.3 Theoretical Implications ... 219

5.4 Practical Implications ... 222

5.5 Limitations of the Study ... 225

5.6 Suggestions for Future Research ... 227

5.7 Conclusion ... 228




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Table 2.1 Reforms and Corporate Governance Devolvement in Malaysia ... 34

Table 3.1 Sample of Study ... 135

Table 3.2 Sample of the Study Based on Industry Group ... 137

Table 3.3 REM Variables and Measurements ... 143

Table 3.4 Measurement of Independent and Control Variables ... 147

Table 4.1 Descriptive Statistics of REM ... 159

Table 4.2 REM Descriptive Statistics by Industry Group ... 160

Table 4.3 Descriptive Statistics of Independent and Control Variables ... 162

Table 4.4 Descriptive Statistics of Dichotomous Variable ACCAE ... 166

Table 4.5 Univariate Test ... 167

Table 4.6 Correlation Matrix of Study Variables ... 172

Table 4.7 Variance Inflation Factor ... 177

Table 4.8 Breusch-Pagan / Cook-Weisberg Test for Heteroscedasticity ... 178

Table 4.9 Wooldridge Test for Autocorrelation ... 178

Table 4.10 Breusch and Pagan Lagrangian Multiplier Test (LM) ... 179

Table 4.11 Hausman Specification Test ... 180

Table 4.12 Regression Results: Random Effect Models of Direct Relationship ... 182

Table 4.13 Regression Results: Random Effect Model of the Moderating Effect ... 198

Table 4.14 Regression Results: Random Effect Models of REM, REM1 and REM2 .. 202

Table 4.15 Regression Results: Random Effect Models, and Pooled OLS Models ... 204

Table 4.16 Robustness of Governance Monitoring Costs Results ... 205

Table 4.17 Alternative Measurements for Family Ownership Concentration ... 207

Table 4.18 Alternative Measurements for Managerial Ownership Concentration ... 209

Table 4.19 Results of the Additional Test to Check Correlation Issue ... 211

Table 5.1 Summary of the Hypotheses Tested and Findings ... 218


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Figure 1.1 The Score of REM in 38 Countries ... 11

Figure 3.1 Research Framework ... 107

Figure 4.1 REM Descriptive Statistics by Industry Group ... 160

Figure 4.2 Normal Plot of Regression Residuals ... 175

Figure 4.3 Histogram for the Normality Test Result ... 175


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Appendix A REM by Years ... 277 Appendix B REM by Industry ... 278


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AC Audit Committee

AEM Accrual-based Earnings Management AOB Audit Oversight Board

BNM Bank Negara Malaysia

CCM Companies Commission of Malaysia CPA Certified Public Accountant

EMIS Emerging Market Information System FASB Financial Accounting Standards Board FDI Foreign Direct Investment

FSA Financial Services Act

GAAP Generally Accepted Accounting Principles GDP Gross Domestic Product

HLFC High-Level Finance Committee on corporate governance IAF Internal Audit Function

IFRS International Financial Reporting Standards IIA Institute of Internal Auditors

IIAM Institute of Internal Audit Malaysia ISA International Standards on Auditing KLSE Kuala Lumpur Stock Exchange

MASB Malaysian Accounting Standard Board MCCG Malaysian Code on Corporate Governance MFRS Malaysian Financial Reporting Standards MIA Malaysian Institute of Accountants

MICPA Malaysian Institute of Certified Public Accountants MMLRs Main Market Listing Requirements

OLS Ordinary Least Squares R&D Research and Development REM Real Earnings Management ROA Return on Assets

SC Securities Commission Malaysia

SFAS Statement of Financial Accounting Standards SOX Sarbanes-Oxley Act

SSM Suruhanjaya Syarikat Malaysia


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1.1 Background of the Study

One of the important sources of information by which both internal and external users (e.g. shareholders, managers, employees, creditors, investors and the tax authority) evaluate companies’ performance is financial reporting. Financial reporting is considered as an important communication device between companies’ managers and capital markets (Dou, Hope, Thomas, & Zou, 2016). Fundamentally, the information in the company’s annual reports should be of a sufficiently high quality to meet the information needs of all internal and external. Enhancing financial reporting quality is expected to result in capital market efficiency, to increase foreign investment flows, improve resource allocation, and increase market liquidity; most importantly, it reduces information asymmetry (Biddle, Hilary, & Verdi, 2009; Doukakis, 2014).

According to Graham, Harvey, and Rajgopal (2005), chief financial officers believe that earning is an essential financial metric for external users. Managers have become increasingly sensitive to the level of their companies’ shares prices and related earnings (Dechow & Skinner, 2000). Generally, companies aim to maximise shareholders’

wealth by increasing the value of their stock. Kalama (2013) provides evidence that earnings are positively associated with shares prices. This means that an increase in earnings may result in an increase in stock prices, and that actual earnings lower than those expected may result in a decline in stock prices (Alarussi & Alhaderi, 2018).

Accordingly, the profit and loss statement is perceived to be the most important part of an annual report (Abdul Rahman, 2001).


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Abad, D., Cutillas-Gomariz, M. F., Sanchez-ballesta, J. P., & Yague, J. (2018). Real earnings management and information asymmetry in the equity market. European Accounting Review, 27(2), 209–235.

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Management, 3(2), 105–111.

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Retrieved from https://ssrn.com/abstract=1767655

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Abdul Rahman, R., & Ali, F. H. M. (2006). Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal, 21(7), 783–804.

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Abernathy, J. L., Beyer, B., Masli, A., & Stefaniak, C. (2014). The association between characteristics of audit committee accounting experts, audit committee chairs, and financial reporting timeliness. Advances in Accounting, 30(2), 283–297.

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