The link between corporate governance and earnings management of insurance companies in Ethiopia

Abstract

Corporate governance is essential to minimizing the conflict of interest between shareholders and management. Its effectiveness becomes even more pronounced when managers have the motivation to deviate from shareholders’ interests because corporate governance mitigates potential conflicts between shareholders and management, especially when managers might be incentivized to prioritize their own interests over the shareholders’ long-term value. Earnings management is used to apply good corporate governance practices and raise a company’s market value across the world. The primary goal of this study is to examine the effect of corporate governance on the earnings management of insurance companies in Ethiopia, because more research has been conducted on banks rather than insurance companies. The study utilized econometric panel data from seventeen insurance companies, spanning the period from 2015 to 2022. The study utilized the generalized moment model (GMM) to identify the effect of corporate governance on earnings management. Discretionary accrual is utilized to assess the earnings management with board size, board independence, board meeting frequency, board gender diversity, ownership concentration, and audit committee financial expertise serving as explanatory variables and these variables are considered to act as a strong monitoring tool that enforces management to convey transparent financial information to the stakeholders in the regulated economy like Ethiopia. The results show that the financial competence of the audit committee and the size of the board have a significant and positive impact on earnings management. This is because audit committees have the financial expertise and know-how to manipulate earnings. Moreover, the positive effect of board size on earnings management is because the higher costs associated with decision-making. Conversely, board independence, board meeting frequency, board gender diversity, and ownership concentration have significant and negative effects on earnings management because more ownership concentration, board gender diversity, board meeting frequency and board independence reduce earnings management. Consequently, the study concludes that all the corporate governance proxies examined in the study have a significant impact on the earnings management of insurance companies in Ethiopia. Therefore, it is recommended that regulators and policymakers reassess their corporate governance policies and reforms to mitigate the earnings management practices of insurance companies in Ethiopia.