The Effects of Corporate Governance on Earnings Quality: Evidence from Iran

Abstract

This paper seeks to examine the association between corporate governance
mechanisms and the quality of accounting earnings. We intend to highlight
the impact of a strong, religious-based, central government where certain
attributes influence corporate governance. Specifically, the study empirically
investigates whether the association of corporate governance mechanisms
with earnings quality (in particular, accrual quality, earnings persistence,
and earnings predictive ability) in Iran is different from what has been
established in accounting literature for other countries. Among many
corporate governance components, four (4) variables of board size, extent
of independent directors, board leadership, and the frequency of the board
meetings are considered in this paper. We test our hypothesis using a
sample of six hundred (600) firm-year observations of the Tehran Stock
Exchange from 2005 to 2008. The general findings are: a larger board size
yields a weaker earnings quality; and an increase in the number of
independent directors and frequency of the board meetings, strengthen the
firm’s earnings quality in terms of earnings persistency and earnings
predictability, however, they do not strengthen the accruals earnings. We,
however, find no significant relationship between leadership structure and
Iranian firms’ earnings quality.