An Investigation of Corporate Governance Mechanisms on Real Earnings Management toward the Changes on Firm Performance: Evidence from Jordan

Corporate Governance were always considered as protection tool towards the stakeholders interest in the capital market. However, the manipulation of the Real Earnings Management activities were also create a major treat among of the stakeholders whenever it were engaged among of top management of the business organizations. In this particular study, it was discussed with the few components under corporate governance mechanism together with theirs impacts on the firm performance in the business organization. It was believed as the selected components were have a significant influence towards the changes of the value relevance towards the business organizations in the capital market activities. Introduction In recent times, Corporate Governance has been enlisted as top priority for the economic growth of any country (Bansal and Sharma, 2016). So, most countries across the globe introduced new codes of better governance practices to align managers interest with the wealth maximization objective of the shareholders. But, despite the introduction of the codes of best governance practices in Jordan in 2009, the results that it has achieved can be said to be minimal as there are, where the Jordanian companies have not yet reached the phase of full compliance with the corporate governance code (Abbadi, Hijazi, and Al-Rahahleh, 2016). literature studies show have devoted considerable attention to the impact of corporate governance mechanisms on corporate behavior. while shows that these mechanisms have a substantial impact on earnings management, and affect performance. In this paper the researcher International Journal of Academic Research in Business and Social Sciences Vol. 8 , No. 11, Nov, 2018, E-ISSN: 2222-6990 © 2018 HRMARS 1391 an examines how governance mechanisms influence firm performance when measured performance is adjusted for the impact of real earnings management. Background of the Study The basic purpose of financial reports is to provide an insight for the different stakeholders and potential investors about the financial performance of the business. The main concern is about the presence of Earnings Management practices in financial reporting processes that produce manipulated and is leading financial reports in order to influence investor and stakeholder decisions (Kumari, Kumari, Pattanayak, and Pattanayak, 2017). In recent years and after the collapse of many companies, became the study of corporate governance in developing countries is very important issue (Arora, Arora, Sharma, and Sharma, 2016). So, Corporate Governance is a structure that monitors the behavior of managers, so that they can be applied by the board of directors and investors, and can affect aspects of management including the management of earnings and structure of capital (Yaseen and Al Amarneh, 2015). As indicated previous studies have also suggested that the administration may use Earnings Management to increase income to hide its poor performance (Habib, Uddin Bhuiyan, and Islam, 2013). So, the relationship of Earnings Management with firm performance is variable, depending on the quality of the firm's management (Tang and Chang, 2015). The main aim of this study is to investigation of the effect of corporate governance mechanisms (board of directors, ownership structure and audit committee) on firm performance when measured performance is adjusted for the impact of real earnings management in developing country such as Jordan. Literature Review Corporate Governance There are various theorists and writers from the renowned countries who have tried to define the term “the combine meaning”. Cadbury Report (1992), suggests the responsibilities as well as duties of the board of governors in an organization and contends that a clear outline of this by Corporate Governance definitely takes the organization to the pinnacle of the success. There are some other definitions which stated that Corporate Governance is a legal framework, and it this framework deals with the rules, regulations, procedures and the conduct of the private sector (Yasser, Entebang, and Mansor, 2015). According to Buallay, Hamdan, and Zureigat (2017). "Corporate Governance is a combination of policies, laws and instructions influencing the way a firm is managed and controlled, it consists of a framework of rules to grant transparency and fairness in the relationship between the firms and its shareholders. In Jordan, Securities Depository Center issued in September 2009 a Corporate Governance guide that defines Corporate Governance as "is the system by which organizations are directed and controlled". (SDC, 2009). Firm Performance According to Lebas (1995) “performance is the transference of the complex reality of performance in organized symbols that can be related and relayed under the same circumstances”. Financial statement of a company is an indicator of the performance of the company. So, If International Journal of Academic Research in Business and Social Sciences Vol. 8 , No. 11, Nov, 2018, E-ISSN: 2222-6990 © 2018 HRMARS 1392 performance of a company is good, as a result the company will strengthen its management for the disclosure of the quality (Herly, 2011). Broadly speaking, the firm's success is reflected through its performance. Thus measuring the performance is critical for a firm’s effective management (Demirbag, Tatoglu, Tekinkus, and Zaim, 2006). A system can never be improved if its outcomes are not measured. So it can be stated that to improve the performance of an organization these measurements are necessary because they help in determining the impact of the resources of the organization. Through the determination of such measurements, a firm is enabled to compare its performance in various instances (Sharma and Gadenne, 2002). Corporate Governance Mechanisms and Firm Performance Corporate governance variables have been shown in other contexts to affect firm performance and behavior. Such variables include board independence, CEO duality, managerial ownership, family ownership, government ownership, Institutional ownership in the firm, audit committee independence, and audit committee Financial expertise. In this section we discuss these variables, which will be the focus of our empirical analysis. Board of Directors and Firm Performance There is an ongoing debate in the area of Corporate Governance to examine its influence on overall corporate performance by different business in the world.The independent board of directors plays an important role in monitoring the firm’s management team. Therefore, the extent to which the board is independent may attract investors (Muniandy and Hillier, 2015). Muniandy and Hillier (2015) report that board independence has a positive influence on firm performance in South Africa. On the other hand, Detthamrong, Chancharat & Vithessonthi (2017) they find that for an average firm, Corporate Governance board independence has no effect on performance. CEO duality arises when the chairman of the board also occupies the CEO position. Advocates of CEO duality cite the argument that duality results in maximized effectiveness, which will be represented in the company performance improvement (Peng, Zhang, & Li, 2007). Additionally, Haniffa and Hudaib (2006) reported that firms with separate CEO and chairman of the board appeared to report superior performance compared to those with duality of role. Sharma and Sharma (2016). Found insignificant relationship between CEO duality and firm performance. Detthamrong, Chancharat & Vithessonthi (2017). They found that for an average firm CEO duality has no effect on performance. Ownership Structure and Firm Performance The researches that have been conducted in the past to check the effects of management impartiality of ownership show the results that are conflicting. A study that was conducted by Kim, Kitsabunnarat, and Nofsinger, in the year 2004, showed the results in which there was a negative relationship between performance of the firm and the managerial ownership. On the other hand, in the past few years some researches show that the relationship between the management equity ownership and firm’s value and agency is a positive relation (Iskandar, Rahmat, Noor, and Saleh, 2011). But there exists empirical evidence that the correlation between the ownership of the managers and the performance of the firm and the value of the market are mixed (Ghazali, 2010). International Journal of Academic Research in Business and Social Sciences Vol. 8 , No. 11, Nov, 2018, E-ISSN: 2222-6990 © 2018 HRMARS 1393 An explanation based on the agency theory is that family dominance in family-based companies is assumed to be associated with lower extents of board independence, higher agency cost and lower level of corporate transparency, and furthermore, the increase of family influence would lower the probability of shareholders taking disciplinary actions (Ballesta & Garcia-Meca, 2005). According to Al-Ghamdi and Rhodes, (2015) who conducted research on the Family Ownership, Corporate Governance and Performance in the firms enlisted in Saudia. The findings from that research reveal that there exists no relation between ownership and the firm performance. While Khamis, Hamdan, and Elali, (2015) concluded the absence of significant relationship of performance with family ownership. The association between Goverment ownership and firm performance has motivated many empirical studies. Porta, Lopez-de-Silanes, Shleifer, and Vishn, (1999) argue that the incentive for government to own shares in firm might be related to achieving political objectives rather than economic objectives. However, the empirical evidence for the relationship between firm performance and state ownership has been mixed results. Some studies report a positive effect of government ownership on firm performance (Liao and Young 2012), while other studies present a negative effect (Mahmood et al. 2011). 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