Good Corporate Governance controls earnings management during financial crises

An increasing stream of literature focuses on corporate governance as one of the underlying causes of the financial crisis. Why did some firms perform better than others during the crisis? Do firms manipulate earnings? The focus of this paper lies on earnings management practices using a unique dataset consisting of firms listed on the five highest capitalized indices of the Eurozone during the periods 2000-2003, 2003-2007, 2007-2009 and 2009-2012. The regression results show positive relations for board size and dual leadership structures, implicating that small boards and separated CEO/chairman functions will reduce earnings management practices during a crisis period. In addition, this paper has found negative relations for board independence at the 10% level. For the audit committee characteristics, size, independence, and expertise, only the latter one is found significant. Therefore these findings are largely in line with most pre-crisis literature. Corporate governance is even during periods of crisis an effective control mechanism to constrain earnings management practices. These results could provide new insights in the influence of corporate governance on earning management. They are measured over a longer crisis period and therefore could have serious implications for future governance design. This thesis contributes to existing literature by adding financial crises periods in which corporate board actions can be of certain importance for differences in earnings manipulations. Overall, good corporate governance is an important determinant of controlling earning management.