the relationship of board characteristic and board remuneration between healthy companies and...

CHAPTER 1

INTRODUCTION

1.0 Introduction

This section discuss on the background of the study, problem statement, research

question or research objectives, significance of the study and structure of the project

paper.

1.1 Background of the study

Corporate governance is defined by MCCG (2012) as “the process and structure used

to direct and manage the business and affairs of the company towards enhancing

business prosperity and corporate accountability with the ultimate objective of

realising long-term shareholder value, whilst taking into account the interests of

other stakeholders”. One of the most important functions of corporate governance is

to ensure the quality of the financial reporting process. The issue of corporate

governance has become more important following the significant increase of

earnings restatement, earnings manipulation scandals, and several high-profile

bankruptcies filing by firms such as Enron and WorldCom and also the corporate

cases in Malaysian companies such Transmile, Megan Media, Scan Associates,

Silver Bird Group, Genneva Malaysia, Perwaja, and many more that left the

stakeholders with substantial losses.

The roles of the boards of directors are challenging as they expected to perform well

in monitoring company performance. They also need to provide strategic advice and

help manage a firm during a crisis Daily, Dalton, and Canella (2003). They are

responsible to ensure financial statements are prepared according to the accounting

standards known as Generally Accepted Accounting Principles (GAAP). They are

the important tool among the different corporate governance mechanism because

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good corporate practices guarantee the transparency, and timely and accurate

disclosure of financial reporting. Therefore, it is vital that the board of directors

exercise effective monitoring role to ensure that financial reports provide quality

information to users by properly reflect underlying economic value of the

transaction.

The study of earnings management is importance to increase the quality of disclosure

of reported earnings. According to Dechow and Dichev (2002) earnings management

can be defined as the use of discretion by those preparing the accounts in pursuing

objectives of a personal or particular nature in order to obtain an advantage or

mislead some stakeholders about the underlying economic performance of the

company. Agency theory views that managers do not always act in the best interest

of the shareholder. They have tendency to use earnings management. For example,

company may overstate the profit to attract investor. Thus, corporate governance is

seen as a medium to mitigate the practises of earnings management.

This study attempts to examine this issue within the Malaysian context. This study

examines earnings management among Malaysian public listed company and

particularly how corporate governance mechanism affects earnings management.

Since earnings management misleads investors by giving them false information

about a firm’s true operating performance, thus, boards have a role in constraining

the practice of earnings management. Therefore, the primary cause of this study is to

focus on the impact of the board of directors’ characteristics that have gained specific

consideration in corporate governance literature such as board size, board

independence, and CEO-Chairman duality towards earnings management.

This study also extends the research of board effectiveness by including the

remuneration of the directors as a determinant. It is possible that the directors make

different performance under different remuneration scheme, but few previous studies

have taken this financial motivation of the directors into consideration. Therefore, the

results of this study might be useful for companies to design more effective

compensation package.

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There is limitation of earnings management and it must comply within the

accounting standard, the standard framework of guidelines for financial accounting

so the financial reporting prepared does not harm everyone, from shareholders or

owners to stakeholder and to accounting profession itself. Therefore, the problem of

earnings management should merit further control.

1.2 Problem Statement

There are lot of loopholes and lack of the study regarding the PN17 companies and

Healthy companies. Our group is motivated by the recent studies that examine how

board remuneration and characteristics affect the earnings management. The

relationship of board characteristics between PN17 companies and Healthy

companies toward earnings management are important issue nowadays. Sheela and

Huang, (2011) found that gender differences affect conservatism, managerial

opportunism and risk preference of the management.

Sakthi (2012) found that Malaysian PLCs use both the accrual and valuation

allowance components of net deferred tax liabilities to avoid a decline in earnings.

Rashidah and Haneem , (2006) study about board, audit committee, culture and

earnings management in Malaysia. The result indicates that the competence of

independent directors based on the age of their tenure as board members, may not be

adequate in assessing and evaluating financial statements. The result also found that

the larger the board, the more ineffective in its monitoring functions.

Daniel and Naveen (2004) suggest that firms with complex operation does not affect

with the negative board size. Morten, Hans and Kasper (2006) found that there is no

sign of firms affected by small increase in size of the board toward the performance.

Benjamin and Weisbach (2010) also indicate that there a chance the larger boards

can be less effective than smaller boards when board consist too many members a

problem may be arise as some of directors would be as free-riders.

In addition Effiezal and Mazlina (2011) found that politically connected firms are

perceived to be riskier and thus require auditors to undertake greater audit efforts

which in turn lead to higher audit fee.

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Therefore, there are lot of loopholes and lack of the study regarding the PN17

companies and Healthy companies. Thus, this study will investigate the relationship

of board characteristic between PN17 and Healthy companies towards the earnings

management.

1.3 Research Objectives

Research objectives are objectives where it can examine the impact of board

characteristic of Healthy companies and PN17 companies towards earnings

management.

RO 1 : To examine the relationship between board characteristic in PN17 Companies

towards earnings management.

RO 2 : To examine the relationship between board remuneration in PN17 Companies

towards earnings management.

RO 3: To examine the relationship occur between Healthy Companies and PN17

Companies towards earnings management.

1.4 Research Question

RQ 1: Is there any significant relationship between board characteristic in PN17

Companies towards earnings management?

RQ 2 : Is there any significant relationship between board remuneration in PN17


RQ 3 : Is there differences between occur between Healthy Companies and PN17


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1.5 Significance of the study

In this research studies, the information that will be provided by pursuing and

attached information in this study will give a big advantage and benefits towards the

firm, bank, investor, government, and public by providing some of empirical data.

Moreover, this research finding can also provide a very good result to the companies

which help them to improve and enhancing their knowledge and increase their

awareness on the effectiveness of corporate governance, such as board remuneration

and board characteristic which consist of board independence, CEO-Duality, board

size and others. Instead of that, companies also can detect and learn the corruption

and implement new guidelines to avoid the same problem repeated.

In addition, this research also can provide a very good knowledge for the new or

young businessman to start their business which exposed the relationship of

corporate governance and earnings management. Thus, it will help them in giving

more knowledge and understanding of the phenomena of interest and to create

theories based on the outcome of this research.

Thirdly, this research study will help the public in doing their further research in

detail by contributing to the existing of this knowledge in their research. Moreover,

public also can manage their investment well by seeing the company earnings

management level.

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Next, this study also can provide better understanding for the company such as, what

is the reason of certain company listed as PN17 and Healthy companies towards

corporate governance and earnings management perspective. Apart from that, it will

explain how the corporate governance gives an impact towards earnings management

through the understanding of value and attitudes that relate with ownership structure.

Last but not least, this study can also represent the effectiveness and give the result

on the board remuneration and board characteristic which consist of Board Size,

Board Independence and CEO-Duality.

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1.6 Structures of the study.

This study is divided into three chapters that had been discussed which contain introduction, literature review, methodology, finding and conclusion.

In the first chapter, in introduction the matter that been discussed is the background of the study which stressed about the board characteristic, board remuneration and earnings management. Furthermore, other parts that are also included are background of the study, problem statement, research question (RQ), research objective (RO), and the significant of the study.

In chapter two, the literature review is being discussed containing previous research that had been done. The previous research contributed by providing information such as the issue and the finding that can be related to the study. The literature reviews illustrate and summarize the literature in this study that can be explained through the relationship between the independent variable with the dependant variable.

In chapter three, the methodology describe on the research design. Within this chapter, this study explained how the data are being collected and the measurement on the independent variable. In this chapter a few type of analysis will be used to test the relationship between the variable such as normality test, test of difference and correlation analysis.

In chapter four, the result and the finding of the analysis that been tested will be featured here. The independent variable are crucial for this study as it will determined either the relationship between dependant variable with independent variable will give a positive or negative results.

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Finally, chapter five will wrap up the overall of this study. The conclusion will comprise of issue that arise and the result of the finding. Furthermore, in this section will be included the limitation in making this study.

CHAPTER 2

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.0 Introduction

This chapter covered about the problem issue and the findings in Board

Remuneration and Board Characteristics which is Board Size, Board Independence,

and CEO-Duality. Thus, the study will be well develops theoretical framework and

hypothesis to be investigate.

2.1 Board Characteristics and Board Remuneration

In this sub chapter, the review and control of this research study consist of well-

explored independent variables in the literature, which is; Board Size, Board

Independence, CEO-Duality and Board Remuneration.

2.1.1 Board Size

Moscu (2013) a study in Romania capital market shown relationship established between board size and corporate performance as a direct relationship. It is being preferred as able to improve profitability, information and diversity in a company.

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A study was conducted by Cheng (2008) relate with board size and the variability of corporate performance. In this study, observation has done and it verify that a bigger size of board have a lower variability to the corporate performance. The study finds it otherwise, as a bigger board is easy to achieve coherence and the smaller board size will point to a less variable corporate performance.

2.1.1.1 Relationship Board Size and Earnings Management

Sirat and Hadi (2012), results from two of corporate governance variables, board of director and audit quality, with firm size found to be significant in determining earnings management measured by discretionary accruals. A positive relation to corporate governance namely board of director; however audit quality were negative relation towards earnings management. Firm size was negative towards earnings management.

Mak and Yuanto (2003) reported those listed firms were valuated from Singaporean and Malaysian firms, which are found highest when the board consists of five members. It is also supported by Moscu (2013) as a general in the capital market in Romania prefer to have five members as a Board of Directors. A direct relationship was established between board size and corporate performance. Therefore, incensement in profitability, diversity and information in a company were found to be directly related.

However, a study by Abdul Rauf, Johari, Buniamin and Abd Rahman (2012) a study on earnings management that impacted by board characteristic and the company itself. A significant negative relationship found between earnings management and cash flow

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from operating activities which indicate a poor performance company tend to do earnings management (accrual) to increase earnings. Based on that study, they find that earnings management practices does not influence by board size of a company in Malaysia.

2.1.1.2 Hypothesis Development

Germain, Galy, Lee (2014) found that there is a positive association on complexity

level of firm in Malaysia with the board independence and the board size. Cheng

(2008) finds that there will give more variability towards company performance

when the sizes are bigger. Chekili (2012) discover that as the board size increase, the

managers’ control will face a threat which includes earnings management.

Therefore, the hypothesis developed as followed: H1 There is a significant relationship between board size and

earnings managements.

2.1.2 Board Independence

In order to have an effective management, they should have both of the independent

non-executive director, strong incentive to monitor the board, and the outcome of the

capabilities to identify earnings management (Peasnell 2000). Based on the study by

Klein (2002) there were negative relationship between director from outsider and

earnings management. However, according to the prior research by Vafeas (2005), it

support the finding of Klein (2002) which finds and confirm that board and audit

committee independent does not significantly related to the likelihood of avoiding

any earnings management/surprises.

In addition, a research studies that have been done by Guay (2008), pointed that

board independence and earnings management, are likely subject to the

endogeneity issue by examining the cross-sectional correlation between the board

independence and earnings management.

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According to, Wan Nordin (2009) which studied about the relationship between

board structure and corporate transparency, the result shows that there is no proof is

discovered to underpin the contention that board independent director advertise

corporate transparency, consistent with past Malaysian Studies.

2.1.2.1 Relationship Board Independence and Earnings Management

Based on the previous study by Kim and Yoon (2008), it is examine that if there is a

changes happen in corporate, it will influence and moderate the earnings

management. This study also did investigate how the corporate influence the

components that can moderate the earnings management practices. From this

research study also, they did found that the board independence director and other

top managerial staff, foreign ownership, and leverage ratio and firm estimate

altogether influence discretional accruals and total accruals. This study were supports

the hypothesis that pointed corporate governance and earnings management are

fundamentally identified.

Bushman (2009), have a done their research and as a result, he pointed that having a

lower board independence and higher earnings management can be part of the

general equilibrium and does not necessarily indicate that board independence

reduces earnings management. Since the changes of board independence and

earnings management can be freely change by some unobservable firm and CEO

characteristics, their research studies that using change of regression still does not

solve this issue.

Besides that, by examining the accounting frauds, in Agrawal and Chadha (2005)

also find that board and audit committee independence are not correlated with the

likelihood of accounting restatements. In contrast, research studies that have been

done by Larcker (2007) also did find that board independence is not correlated with

signed abnormal accruals, the absolute value of abnormal accruals, or the likelihood

of accounting restatements.

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Moreover, the research study of Larcker et al. (2007) also did find that board

independence is not correlated with signed abnormal accruals, the absolute value of

abnormal accruals, or the likelihood of accounting restatements. Despite that, 2 years

after that, Bushman (2009), have a done their research and as a result, he pointed that

having a lower board independence and higher earnings management can be part of

the general equilibrium and does not necessarily indicate that board independence

reduces earnings management. Thus, as a result from this research studies, it is

shows that the independence board director which is including of the top managerial

staff, foreign ownership, ownership concentration, and leverage ratio and firm that

estimate altogether did not influence earnings management.

H2 There is no significant relationship between Board Independence and

Earnings Management.

2.1.3 CEO-Duality

Duality of roles refers to a circumstance where a firm’s CEO also serves as chairman

of the board of directors (Abdullah, 2004). There are two contending perspectives

found in the literature about the advantages and disadvantages of CEO duality. One

school of thought believes that the board is more effective by having a separation

between the roles of chairman and CEO. Finkelstein and Mooney (2003) argue that

separation of roles has enabled boards to perform their oversight functions

effectively because such boards are considered to be independent. Besides, Schmid

and Zimmermann (2005) stated that an independent chair might have vital contacts

with banks and the government, which can provide valuable networking for the

company.

A study was conducted by Elena and Mike (2013) on the influence of powerful chief

executive towards the financial performances of UK firms stated that CEO chair

duality give impact on the higher level decision making power of CEO. The study

also finds that the financial performance of the firm is positively affected by CEO

decision-making power expressed by duality of the titles. The theory supported by

the finding where the ROA is positively associated with the roles duality.

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The previous study on corporate governance and accounting enforcement action in

Italy by Giula and Andrea (2012) identified related issue of the boards such board

size, CEO duality, and board independence towards the quality of the financial

statement of Italian listed companies. The paper observed on consolidated accounts

deemed by the regulator not to comply with generally accepted accounting standards

and hence subject to an enforcement action. It is found, the firms with roles duality is

appear more likely in the fraud firm rather than non-fraud firm mainly because the

powerful single person can exercise power of control over the firm.

2.1.3.1 Relationship CEO-Duality and Earnings Management

Prior studies (Supawadee, Subba, and Omar, 2013) focused on the study of the

influence of board characteristic on earnings management behaviour in Thai listed

companies found the significant associations between earnings management and

CEO-Chairman duality, board size, as well as board meeting. Moreover, it is found

there is a positive significant relationship between board independence and

discretionary accruals. It was noted that the role of duality is playing an important

role to control earnings management among Thai listed companies as a director on

the board which holds dual chair in the firm can assist the board to carry out their

oversight functions effectively use their vast knowledge and expertise in business

affairs.

Study conducted by Mohd Norman, Mohd Takiah, and Mohd (2005) on the

relationship between earnings management and board characteristic from Malaysian

perspective and found that the existence of CEO-Chairman duality have influences

on earnings management in a firms. They also found the negative impact of the

increasing of the independent director on the board on the action of CEO-Chairman

towards earnings management practises. The result implies that the external

monitoring mechanism is less effective towards firms that practise roles duality. This

finding is consistent with the earliest research by Xie (2003) that found roles duality

have significant influence on earnings management.

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This study addresses the issue of corporate governance and focuses on two main

characteristics of board effectiveness that is board independence and CEO duality on

the practice of earnings management in Malaysia. According to the research

conducted by Hafiza Aishah and susela (2008) the result from the study indicate that

neither board independence nor CEO duality effectively constrained earnings

management, even after the code of conduct of corporate governance reforms were

introduced. To ensure a balance of power and authority of a company that can lead to

more independent boards (Owyong and Guan, 2000) recommends that all listed

companies should have no role duality.


It is still an empirical question of whether roles duality reflects poor corporate

governance in a firm that may results in higher earnings management in Malaysia.

The new Malaysian code of corporate governance (MCCG, 2012) did not encourage

the practise of CEO duality. The external monitoring mechanism is less effective

towards firms that practise roles duality Mohd Norman et al., (2005). This finding is

consistent with the agency theory that predicts a positive relationship between CEO

duality and earnings management Xie et al (2003). Hence we hypothesize the

following:

H3 There is a significance relationship between CEO duality and earnings management.

2.1.4 Board Remuneration

Director remuneration is includes basic salary, bonus option, restricted share plan,

pension and other benefits Rashidah (2006) and according to Peng and Roell (2008)

executives can be motivated with higher incentives, so that they can manipulate the

firm’s resources and push stock prices upwards. Liang (2004) also stated that higher

incentives can makes market gain confidence with the executives’ capabilities. Fich

and Shivdasani (2006) found that it is reasonable because the opportunity cost of

attending meeting meetings is increase and that directors accumulate more

directorships in other company.

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Excessive payment that being made to directors and remuneration largely depend on

the performance of the company in order to have better corporate governance.

Shamsul (2006). Gneezy and Rustichini (2006) found that director will perform

better in doing their responsibility towards the company when the payment that be

made to them is higher but they will perform better if they don’t get any payment

rather than being paid with small amount of money.

Directors should be willing to attend the general meeting when they are paid

thousands dollar than nothing Black et. Al. (2006) and also claimed that outside

directors are not included in the company for money. Stout (2003) found that

remuneration paid based on performance based compensation will affect the qualities

of the directors in monitor their firm.

2.1.4.1 Relationship Board Remuneration and Earnings Management

Based on Yet Chu and Imm Song (2012) relationship between managerial

compensation and performance are not directly observed if the market is inefficient

because executives may apply earnings management to signal to the market, to

increase executive compensation and investment and there is an increasing trend in

executive compensation. Bergstresser and Philippon (2006) found that executive

directors engage in opportunistic earnings management to increase the earnings and

stock price, which is lead to improvement in remuneration packages. Graham,

Campbell and Shiva's (2005) found that managers are willing to delay their

investment in order to meet earnings target as stated in their compensation contract.

Malaysian Code of Corporate Governance (2001) stated that the remuneration should

be attractive enough to persuade directors who have the ability to manage a company

successfully and the package should be tied to company and personal performance.

The remuneration should be good with the responsibility of the director’s and

experience to manage a company and this will increase the percentage of higher

earnings to the firm.

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Akinobu (2007) found that when managers do not receive a bonus, they will engage

in income-decreasing earnings management to maximize their future bonuses. It also

shows that if the earnings are below in earnings based bonus plans, managers have an

incentive to lower it even further. Zhu, Y. & Tian, G. G. (2009) found that firm

performance is adjuster for the effect of earnings management when CEO pay-

performance relation is substantially lower.


Lan sun (2012) found that management accounting choice is driven by incentive

compensation that management would adopt a multi-dimensional income strategy.

Director will perform better in doing their responsibility towards the company when

the payment that be made to them is higher (Gneezy and Rustichini, 2006).

Therefore, the hypothesis is as follow.

H4 There is a significant relationship between director remuneration and

earnings management.

2.2 Relationship PN17 Company and Healthy Company towards Earnings

Management

Etemadi et al,. (2012) have proven that PN17 companies likely manage their

earnings rather than non-distressed companies and distressed companies will use the

highest level of accruals a year before the distressed period.

Charitou, Lambertides and Trigeorgis (2007) examine the managerial discretion in

PN17 firms which to prove that PN17 firms that had never received any form of

qualified opinion had income-increasing behaviour are surely not the same as

previous year. Due to Gaap departure, qualified audit opinion gives an earlier signal

to the market because that they may be rendered in years which prior to the going-

concern opinion years.

According to Chen, Chen and Huang (2010) research studies which examine the

behaviour of earnings management among financial distressed firms in India. The

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final result that they obtain in their research studies shows that the financial

distressed firms will adopt different type of earnings management either before or

after the distressed period. While that, according to Habib, Bhuiyan and Islam (2012)

which conducted a study to examine the earnings management that practices among

the PN17 Company and whether the earnings management practices might changes

during financial crisis. The result of their studies shows that the management in

financially PN17 Company will use earnings management practice to manage their

earnings downwards compared to financial healthy company.

2.2.1 Hypothesis Development

Habib, Bhuiyan and Islam (2012) provide an evidence of the relationship between

PN17 companies and healthy companies. The result of their research studies which is

examine the earnings management practices among the PN17 companies which

manager in financial PN17 companies will use earnings management practices rather

than healthy companies to manage their earning downwards.

H5 There is significant difference between PN17 companies and healthy

companies towards earnings management.

2.3 Agency Theory

This research study did use agency theory because Rashidah (2006) did pointed that

the agency relationship exist as the contractual relationship between the capital

provider to the company and top management team which the one who run the

business. Despite from that, according to the Arnold and De Lange (2004), when

there is occur differences attitude risk between shareholder and manager, and then

agency problem will arise. Manager might not do their best for the shareholder

interest and more prefer action with shareholder. Thus, there will also exist different

interest and risk preferences for the shareholder.

Cathy (2008) have examines about the incentives and information asymmetry,

manipulated concurrently. This studies also predicts managers who experience the

agency problem will take action that will maximizes their bonus incentive (i.e.,

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decrease current-year earnings) while managers who do not experience the agency

problem will be more likely to take action that maximizes the company’s best

interest (i.e., maximize current earnings for IPO purposes).

2.4 Theoretical Framework

Tittle: The relationship between Board Remuneration and Board Characteristic

which consist of Board Size, Board Independence, and CEO Duality towards

Earnings Management in PN17 Companies.

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INDEPENDENT VARIABLE

Board Characteristic:1. Board Size2. Board

Independence3. CEO Duality

Board Remuneration

DEPENDENT VARIABLE

EARNINGS MANAGEMENT

CHAPTER 3

METHODOLOGY

3.0 Introduction

This chapter provides information to the reader on data study and methodology. It

discusses on the purpose of doing data study research methodology. There are four

purposes of research methodology of this study that is to explain the sample

selection, describe the procedure used in designing the instrument and collecting the

data, and provide an explanation of the statistical procedures used to analyse the data.

3.1 Type of study

This study requires gathering relevant data from the specified documents and

compiling databases in order to analyse the material and arrive at a more complete

understanding of the issue discussed. The quantitative data was selected in doing this

research paper because it provides substantive and relevant data. Through this

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studies, quantitative data is gathered from various secondary source such annual

report, focus group and internet.

3.2 Population and Sample

The population of this research was developed from the companies that are listed in

bursa Malaysia that consist of both distressed and non-distressed companies. There

are 28 financial distressed companies that were categorized as PN17 in Bursa

Malaysia and the sample of healthy companies is selected from the main market in

Bursa Malaysia. Similar type of industries will be used to matching both Healthy

Company and PN17 Company. However due to lack of information provided by

Bursa Malaysia, we were choosing only 21 PN17 Companies and 21 Healthy

Companies. The independent variable and dependent variable is used as a

mechanism to measure the data that collected. The independent variable is Board

Remuneration and Board Characteristics that consist of Board size, Board

Independence, and CEO duality while the dependent variable would be earnings

management.

3.3 Data Collection Procedure

The data collected for this research is based on secondary data consist of annual

report from the Bursa Malaysia website and also from the company’s websites. In

this study, the sample is taken from the annual report of total 42 companies that are

listed in Bursa Malaysia. Out of 42 companies, 21 companies are taken from PN17

Company and another 21 company are taken in the main market in Bursa Malaysia.

The period of three consecutive years of financial data from 2010 to 2012 is

extracted from annual report of the selected companies to be analysed.

3.4 Measurement of Variables

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3.4.1 Measurement of Dependent Variable – Earnings Management

This research study will be adopted Lang (2006) model which to test the earnings

management.

Earnings Management = ∆ in Net Income (NI) / ∆ in Cash Flow

Where:

* ∆ in Net Income (NI):

= Current year income – Previous year income

* ∆ in Cash Flow

= Current year Cash Flow – Previous year Cash Flow

This research study also use this model by comparing net income (NI) and cash flow

between Healthy Companies and PN17 Companies. To ensure that the result will be

balance, this study has selected the net income and cash flow by referring to the asset

size of PN17 companies and match it into Healthy Company which have the exactly

same industry.

3.4.2 Measurement of Independent Variable

3.4.2.1 Board Size

Board size is measured based on the number of directors that are employed by the

company. Shakir (2010) board size is referred to the total number of directors on the

board of each sample firm which is including the CEO and Chairman. Those are also

including the executive director, outside directors and non-executive directors. This

study will measure the board size based on their actual sizes.

3.4.2.2 Board Independence

Based on the past research studies of measurement of board independence towards

earnings management which is from Jaggi, Leung and Gul, it is stated that the

member of the board executives director are measure by the fraction of INED in the

board directors. The criteria that can be considered by the director as INED are the

director should have not hold any executive position in the firm. Thus, not all the

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directors are independent. The non-independent directors will be excluded from

INED category. Therefore, the measurement of this study will measure the board

independence based on actual amount of each of the companies.

3.4.2.3 CEO-Duality

We categorize a firm as having a CEO duality when one person occupies both board

chair and CEO positions. We define this variable to take the value 1 when there is

CEO duality and as 0 otherwise.

3.4.2.4 Board Remuneration

Board remuneration is measured by taking the total cash compensation data (total

salary and bonus) of the directors on the board as stated in annual report.

3.5 Statistical Analysis

This study will use a few types of statistical analysis to assess the data. They are

descriptive statistic, normality test, Inferential Statistics and correlation.

3.5.1 Descriptive Statistics

Descriptive Statistic consists of an organizing and aiming to summarizing the data

obtained. A descriptive statistic is a collection of data or numerical summary of data.

The aim of the descriptive statistics is to summarize a sample and to check data

accuracy by evaluate all variable entered into the data file. The descriptive statistics

that is use for this study is frequency distribution. Sekaran and Bougie (2009), found

that frequency is referring to the number of times in various situation. The result can

be seen in the cumulative percentage and percentage of the occurrence that are easily

to calculate.

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3.5.1.1 Normality Test

Normality test is assessments for normality of a data as a prerequisite to many others

statistical test is consider an underlying assumption in parametric testing. There are

two type of test can be used. First one is Kolmogorov Smirnov test is qualified for

sample more than 50. For the second one is Shapiro-Wilk test that is used for total

sample of less than 50.

The Kolmogorov Smirnov test will be used in this study. It is due to the amount of

samples are up to more than 50 companies. Normality test will produce p-value

which is useful in determining either the result will fall in normally distributed

category or not. If the p-value is more than 0.05, it is consider to be normally

distributed. On the other hand, if the p-value is less than 0.05, the data are not

normally distributed. There are two type of test, which are Parametric Test and Non-

parametric Test. Data that is normally distributed will run the Parametric Test. For

data that are not normally distributed, Non-parametric Test will be used.

3.5.2 Inferential Statistics

Inferential Statistics is one of a way to analyse data. It is done by using the data that

have been measured to form a conclusion. This will able the samples to be generalize

to the population for which the samples are obtained.

3.5.2.1 Test of Deference

For two components, independent sample T-test model will be used for the

parametric. For non- parametric, a Mann Whitney Test model will be used. But, if

the component that are more than two, a parametric will use Analysis of Variance

(ANOVA) model. For the non-parametric will use Kruskal Wallis model.

3.5.2.2 Correlation

The correlation is a statistical measurement on a relationship between two variables,

independent variable and dependent variable. The range is start from +1 to -1. A +1

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correlation indicating a perfect positive correlation, mean both of the variables move

in the same direction together. For a zero correlation, there is no correlation between

the two variables. For -1, indicating a perfect negative correlation that shows one

variable will goes up and the other ones will goes down. The correlation is

interpreted using correlation coefficient. There is two models to find correlation,

which are Pearson and Spearman. A normal data will use Pearson model. On the

other hands, Spearman is used for the data that is not normal.

CHAPTER 4

RESULT

4.0 Introduction

This chapter will provide result which has been obtained through the analysis that

have been conducted based on the data collected from PN17 companies and healthy

companies from Bursa Malaysia. The data was collected to calculate changes in net

income and cash flow from operation from the annual report of PN17 Company and

Healthy Company for year 2009, 2010, 2011 and 2012 in order to find result for year

2010, 2011 and 2012. The total population was 42 companies which 21 companies

categorized in PN17 companies and 21 companies categorized in healthy companies.

23

There were actually 28 company listed as Practice Note No 17 (PN17) in 2013 and

21 were chosen to be as our data collection.

4.1 Descriptive Analysis

4.1.1 Changes Net Income over Total Assets

Year 2010 2011 2012N for PN17 Company

21 21 21

N for Healthy Company

21 21 21

Mean of changes for PN17 Company

4.8896 -9.2439 7.9566

Mean of changes for Healthy Company

-4.3614 0.0543 -0.0539

Table 4.1.1: Changes Net Income over Total Assets

Figure 4.1.1: Graph Changes Net Income over Total Assets

Table and Figure 4.1.1 shows that the mean value of changes in net income over total

asset for PN17 and Healthy Company. Thus, by looking the result of mean from both

24

2010 2011 2012-15.0000-10.0000

-5.00000.00005.0000

10.00004.8896

-9.2439

7.9566

-4.36140.0543 -0.0539

Change of net Income over Total Asset

Mean for Distress Company Mean for Healthy Company

Year

Mea

n

PN17 and Healthy Company from the graph, it does suggest that the different

between these two groups were appeared to exist.

For each year, the average changes net income over total assets of PN17 Company is

significantly higher than Healthy Company except in year 2011. In year 2010 it

shows that the mean values were 4.8896 which much higher compared to Healthy

Company which only have mean value at -4.3614. However in year 2011, the mean

were drop to -0.9.2439 which lowers than mean value of Healthy Company by

0.0543 for year 2011. Apart from that PN17 company shows that increase in the

value and compare to Healthy Company in year 2012, which the mean value for year

2012 were at 7.9566 for PN17 Company and -0.0539 for Healthy Company.

4.1.2 Changes Cash Flow Operation over Total Assets

2010 2011 2012N for PN17 Company

21 21 21

N for Healthy Company

21 21 21

Mean of changes for PN17 Company

-.0107 -3.5320 .0326

Mean of changes for Healthy Company

24.7026 -7.1079 -24.2906

Table 4.1.2: Changes Cash Flow from Operation over Total Asset

25

2010 2011 2012

-30.0000-20.0000-10.0000

.000010.000020.000030.0000

-.0107 -3.5320 .0326

24.7026

-7.1079

-24.2906

Change of Cashflow from Operation over Total Asset


Year

Mea

n

Figure 4.1.2: Graph Changes Cash Flow from Operation over Total Asset

Table and Figure 4.1.2 shows the mean value of changes in cash flow from operation

over total asset for PN17 Company and Healthy Company. Thus, by looking the

result of mean from both PN17 and Healthy Company from the graph, it does

suggest that the different between these two groups were appearing to exist.

For the year 2010, the mean value for both types of groups does shows that much

different which the value were -0.0107 for PN17 Company and 24.7026 for Healthy

Company. While in year 2011, there are very much different as they drop their mean

value which both, PN17 and Healthy Companies drastically drop until negative mean

value where it is -3.5320 and for Healthy Company which drop to -7.1079. However,

PN17 company again having a huge of different changes in mean value which

drastically increase to 0.0326 while Healthy Company decrease in mean value and

drop to -24.2906.

Therefore this result shows that PN17 Company have high possibilities of effectively

manage their cash flow over from operation over total asset compared to Healthy

Company as it shows Healthy Company constantly having their mean value

decreasing while PN17 Company having up and down trend over their mean value.

26

2010 2011 2012

-30.0000-20.0000-10.0000

.000010.000020.000030.0000

-.0107 -3.5320 .0326

24.7026

-7.1079

-24.2906

Change of Cashflow from Operation over Total Asset


Year

Mea

n

4.2 Normality Test

4.2.1 Test of Normality (Shapiro-wilk)

Shapiro-WilkStatistic df Sig.

EARNINGS MANAGEMENT PN17 2010 .368 21 .000



EARNINGS MANAGEMENT HEALTHY 2010 .582 21 .000



BOARD REMUNERATION 2010 .649 21 .000

27



BOARD INDEPENDENCE 2010 .915 21 .068



BOARD SIZE 2010 .800 21 .001

BOARD SIZE 2011 .834 21 .002

BOARD SIZE 2012 .873 21 .011

CEO-DUALITY 2010 .484 21 .000

CEO-DUALITY 2011 .484 21 .000

CEO-DUALITY 2012 .422 21 .000

Table 4.2.1: Test of normality

As shown in table 4.2.1, this study is using Shapiro-Wilk test as the sample in less

than 50 companies. 42 companies are used in this study which is the companies from

Public Listed Companies in Bursa Malaysia. The result shows that the significant

value is less than 0.05 for every variable except for Board Independent in 2010

which is 0.068 and for 2011 is 0.102. Therefore, the data above is not normally

distributed. Thus, non-parametric test should be used to test the hypothesis.

4.3 Correlation Analysis

4.3.1 Board Size towards Earnings Management

BS2010

Correlation Coefficient .107Sig. (2-tailed) .645N 21

BS2011

Correlation Coefficient -.328Sig. (2-tailed) .147N 21

28

BS2012

Correlation Coefficient .091Sig. (2-tailed) .693N 21

Hypothesis 1 (H1) predicts that there is significant relationship between board of

director size and earnings management of PN17 Companies. The p value for 2010 is

0.645, 2011 is 0.147, and 2012 is 0.693 which is higher than 0.05. From this study,

the result shows that board size and earnings management has no significant

relationship. Thus, hypothesis (H1) is rejected. This finding is contradict Hadi (2012) as the results from two of corporate governance variables, board of director and audit quality, with board size found to be significant in determining earnings management measured by discretionary accruals.

4.3.2 Board Independence towards Earnings Management

BI2010 Correlation Coefficient .022Sig. (2-tailed) .923N 21

BI2011 Correlation Coefficient -.267Sig. (2-tailed) .241N 21

BI2012 Correlation Coefficient .093Sig. (2-tailed) .688N 21


director independence and earnings management of PN17 Company. The p value for

2010 is 0.923, 2011 is 0.241, and 2012 is 0.688 which is higher than 0.05. From this

study, the result shows that board independence and earnings management has no

29

significant relationship. Thus, hypothesis (H2) is rejected. This finding is similar with

research studies that have been done by Larcker (2007) find that board independence

is not correlated with signed abnormal accruals.

4.3.3 CEO Duality towards Earnings Management

CD2010

Correlation Coefficient 0.000Sig. (2-tailed) 1.000N 21

CD2011


CD2012


Hypothesis 3 (H3) predicts that there is significant relationship between CEO duality

and earnings management of PN17 companies. The p value for 2010 is 1.000, 2011

is 0.157, and 2012 is 0.560 which is higher than 0.05. From this study, the result

shows that CEO duality and earnings management has no significant relationship.

Thus hypothesis (H3) is rejected. This is contradicting with the study conducted by

Mohd Norman, Mohd Takiah, and Mohd (2005) on the relationship between earnings

management and board characteristic from Malaysian perspective. They found that

the existence of CEO-Chairman duality have influences on earnings management in

a firms.

4.3.4 Board Remuneration towards Earnings Management

BR2010 Correlation Coefficient -.042Sig. (2-tailed) .856N 21

30




director remuneration and earnings management of PN17 Company. The p value for

2010 is 0.856, 2011 is 0.267, and 2012 is 0.171 which is higher than 0.05. From this

study, the result shows that board remuneration and earnings management has no

significant relationship. Thus hypothesis (H4) is rejected. This finding is contradicts

with Akinobu Shuto (2007) as he found that managers will engage in income-

decreasing earnings management to maximize their future bonuses.

4.3.5 Mann-Whitney Analysis

EM_2010 EM_2011 EM_2012Mann-Whitney U

190.000 219.000 202.000

Wilcoxon W

421.000 450.000 433.000

Z -.767 -.038 -.465

Asymp. Sig. (2-tailed)

.443 .970 .642

a. Grouping Variable: GROUP

Hypothesis 5 (H5) predicts there is significant difference between PN17 companies

and healthy companies towards earnings management. The p value for 2010 is 0.443,

2011 is 0.970, and 2012 is 0.642 which is p-value for 2011 and 2012 were higher

31

than 0.05. Thus Hypothesis 5 (H5) is rejected. This findings were contradicts with

Habib, Bhuiyan and Islam (2012) as they found that earnings management practices

among the PN17 companies which manager in financial PN17 companies will use

earnings management practices rather than healthy companies to manage their

earnings downwards.

CHAPTER 5

CONCLUSION

5.0 Introduction

This study examines the effects of board size, board independence, board

remuneration and CEO-Chairman duality on earnings management among Malaysian

public listed company (PLCs) which is Healthy Company and Distress Company. 28

financial distressed companies categorized as PN17 and 28 financial healthy

companies are selected from the main market in Bursa Malaysia. Similar type of

industries will be used to matching both healthy company and Distress Company.

32

This can be further studied by using Mann Whitney Test model and correlation. The

impact can be further evaluated

5.1 Summary of finding

To identify the objectives of this study, the finding obtained which are to determine

any significant relationship in size of board of directors, board independence, CEO-

Chairman duality and board remuneration on earnings management between Distress

and Healthy Company. By using Mann Whitney Test Model and correlation, five

relationship of hypothesis is identified.

The entire rejected hypothesis shows that there is no significant relationship between

independents variables and earnings management.

Hypothesis Result

H1 There is a significant relationship between board size and earnings managements

Reject

H2 There is significant relationship between Board Independence and earnings management.

Reject

H3 There is a significant relationship between director remuneration and earnings management.

Reject

H4 There is a significant relationship between CEO duality and earning management

Reject

H5 There is significant difference between distressed companies and healthy companies towards earnings management

Reject

33

5.2 Recommendation

There are a few improvements that can be considered to gain more valuable

information. There are listed as below.

In order to get an accurate result, they can improve the result by adding more

variable such as gender and audit fees paid. The presence of female in the board will

lower the tendency of earnings management as they are afraid to do earnings

management. But on the other hands for the audit fees paid, it will give a signal that

they did manage their earnings if when it spent too high or more than usual.

Next, by adding the number of years (i.e.10 years) as the timeline, the result can be

more accurate and consistent. With a period longer than three years, it may provide

an adequate time to gain more accurate and consistency information towards the

result.

Lastly, including the sector of the company may also contribute to the research in the

future. In different sector, there will be its own opportunities and risk. Thus, each

company exposed to commit earnings management based on their sector itself.

5.3 Limitation

This study has a few limitations. First, the sample used consist only 21 companies

from each PN17 Companies and Healthy Companies and only covered for period of

three years. This may consider inadequate time to measure the impact for each

variable towards each company’s performances.

Next, this study is inefficient in minimizing possible short-term changes in variables

values within each company. Other than that, it is only limited to examining four

components of board structure only, such as board size, board remuneration, board

independent and CEO duality. By including other factors may be beneficial to

34

enhance the model development in this study. In future, this study can be conducted

in more sufficient resources and extend the period of collecting data from five to ten

years.

Lastly, the limitation is the difficulty of accessing information as well as lack of

information in conducting the research. Some company did not disclose their net

income or even cash flow in respective years. Thus, due to lack of information, we

limit our company to 21 each from PN17 companies and Healthy Companies.

]

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APPENDICES

LIST NAME OF THE 21 PN17 COMPANIES AND 21 HEALTHY COMPANIES

NUMBER

PN17 COMPANY HEALTHY COMPANY SECTOR

1 ADVENTA BHDCONCRETE ENGINEERING

INDUTRIAL PRODUCTS

2 AUTO AIR HOLDING PERSTIMA BHDINDUSTRIAL PRODUCTS

3INTEGRATED RUBBER OKA CORPORATION

INDUSTRIAL PRODUCTS

4 IRM GROUP BERHAD A-RANK BHDINDUSTRIAL PRODUCTS

5 LION CORPORATIONLAFARGE MALAYAN BHD

INDUSTRIAL PRODUCTS

6 MALAYSIA AE ANCOM BHD INDUSTRIAL

38

MODEL PRODUCTS

7 OCTAGONCHIN WELL HOLDING BHD

INDUSTRIAL PRODUCTS

8 MAXTRAL BHD MUDA HOLDING BHDINDUSTRIAL PRODUCTS

9 PERWAJA BHDMALAYSIA STEEL WORK BHD

INDUSTRIAL PRODUCTS

10GLOBAL CARRIER BHD SEG INTERNATIONAL

TRADING/SERVICE

11 HAISAN RESOURCESEMAS KIARA INDUSTRIES BERHAD

TRADING/SERVICE

12 HEXAGON HOLDINGMY EG SERVICE BERHAD

TRADING/SERVICE

13 LFE CORPORATION GUNUNG CAPITAL BHDTRADING/SERVICE

14PETROL ONE RESOURCES

CHUAN HUAT RESOURCES

TRADING/SERVICE

15SUMATEC RESOURCES

NAIM INDAH CORPORATION

TRADING/SERVICE

16 BINA GOODYEAR KUMPULAN JETSONCONSTRUCTION

17HO HUP CONSTRUCTION TSR CAPITAL

CONSTRUCTION

18PAN MALAYSIAN INDUSTRIES

SOUTH MALAYSIA INDUSTRIES

PROPERTY DEVELOPMENT

19 HYTEX INTEGRATEDHUAT LAI RESOURCES BHD

CONSUMER

20ECM LIBRA FINANCIAL GROUP OSK HOLDING BHD

FINANCE

21PAN MALAYSIAN CAPITAL JOHAN HOLDING BHD

SERVICES

39

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