Earnings Quality and Corporate Governance in Jordan:

An Exploration in a Developing Market Context

FAHID ALI YOUNIS FREIHAT1, MOHD RIZUAN ABDUL KADIR1,

KHAIRUL ANUAR KAMARUDIN2, RAEDAH SAPINGI1

1College of Graduate Studies,

Universiti Tenaga Nasional,

MALAYSIA

2School of Business,

University of Wollongong,

Dubai,

UNITED ARAB EMIRATES

Abstract: - The primary purpose of this research is to examine the impact of corporate governance mechanisms,

namely, the board of directors' characteristics (expertise, independence, and directors’ remunerations) and AC

characteristics (AC Independence, AC Expertise, and AC Activity) on earnings quality in the Jordanian

context. Using the Eviews software to analyze panel data of 94 non-financial listed companies from 2015 to

2021, the results revealed that board expertise, board independence, AC Activity, and AC Expertise have

significantly negative effects on EM, which reflects that these mechanisms have a significant and positive

influence on earnings quality in Jordanian non-financial companies. This supports the predictions of agency

theory, which predicts that active audit committees, expert members on the audit committees, and the

experience and independence of the board members expect to enhance the quality of earnings. Conversely, the

findings show that AC Independence and directors’ remuneration have an insignificant effect on EM. The

results reveal the critical role of board members and audit committees in enhancing the earnings quality of

Jordanian companies. This study suggests that Jordanian policymakers need additional support and

enhancement regarding CG mechanisms, particularly in Jordan’s transitioning economy, to attract additional

investors.

Key-Words: - CG Mechanisms, Earnings Quality, Audit Committee, Board Of Directors, Directors’

Remunerations, Directors’ Expertise, Directors’ Independence, AC Expertise, AC Activity.

Received: February 19, 2024. Revised: July 19, 2024. Accepted: August 13, 2024. Published: September 26, 2024.

1 Introduction

The various crises and scandals in the world

highlight the vital need for enterprises in various

economies (developed or developing economies) to

enhance corporate governance standards and

reclaim investors' trust in the accuracy of

accounting numbers, [1]. Corporate governance

(CG) measures, particularly earnings quality (EQ),

are critical in strengthening financial reporting

quality. Due to global business failures, the

attention to the impact of CG on profit quality has

been increased, [2]. Without a doubt, financial

reporting is considered one of the fundamental

foundations of any economy's financial systems to

provide the necessary information to assess a

company's true profitability and performance. Such

information must be created to allow various users

to determine and evaluate profitability, while

effectively measuring prior performance.

The reported net profit is also included in the

financial statement, which is essential in

determining the performance and value of the

firms. Furthermore, a diverse group of users uses

the disclosed net profit, including management,

potential investors, analysts, stockholders, and

researchers. As earnings in financial statements can

be determined on an accrual basis, they can be

influenced by accounting estimations and

techniques, [3].

As financial reporting is a crucial tool that

users are required to make sound economic

decisions, the information must be validated by an

impartial and effective audit. Nonetheless, recent

financial reporting issues have seen various

concerns about companies' scandals regarding

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accounting and financial issues that have raised

several questions about the accuracy of financial

reports. The aftermath of rich profits, followed by

the final collapse of large corporations worldwide,

is considered an unavoidable indicator. This has led

to criticism of the effectiveness of CG processes

and boards regarding overall firm management and

financial reporting duties, [4], [5].

Earnings quality has been a significant topic,

following a string of corporate failures caused by

the revelation of false and transient earnings.

Consequently, investors become overly

preoccupied with evaluating organizations' stated

earnings and using them to make financing

decisions, [6], [7]. High earnings quality is an

unavoidable requirement for decision-making and

investment, which results in profitable returns.

While poor earnings quality indicates concerns

regarding the integrity and reliability of disclosed

earnings, investors face the danger of receiving

unsatisfactory returns on their business, [8].

In Jordan, the protection of investor rights

remains below average, indicating that investors'

rights are inadequate. Jordan's capital market might

face challenges in convincing investors that their

businesses are managed responsibly, [9]. Various

incentives for-profit management strategies have

been identified in Jordanian enterprises, including

tax avoidance to attract more investors, increasing

management salaries and share prices, and lowering

customs fees. Furthermore, favoritism, tribalism,

and the recent Middle Eastern revolutions (Arab

Spring) were the main factors that created pressure

on Jordanian firm management to exercise earnings

management (EM) and the obstacles that prevented

CG mechanisms from being deterrent mechanisms

in enhancing FRQ, [10].

The successful implementation of CG

procedures and the independence of members in

audit committees and boards are still inactive, as

previous impediments played an essential role in

limiting such issues in one of the developing

economies, Jordan, [11]. Several prior studies have

revealed that EM practices exist among Jordanian

companies, and some Jordanian companies

manipulate their earnings to meet specific goals by

utilizing the flexibility provided by regulations and

accounting standards, [10], [12], [13], [14]. Thus,

this study is motivated by the rising importance that

earnings quality and corporate governance systems

have earned from shareholders, investors, and all

stakeholders, as well as the critical role of earnings

quality in assuring FRQ.

Various studies have been conducted on CG

mechanisms in developed economies. Countries in

the MENA context, however, have received little

attention, and investigations into CG issues in such

regions are underdeveloped. Investigations and

research from developed economies raise questions

about the direction or extent of the expected

association in developing economies, like Jordan.

Such uncertainties stem from institutional

differences between developed economies and

Jordanian markets, such as Jordan's less stringent

auditor liability, low disclosure requirements, as

well as weaker government enforcement, [15].

In light of Jordan's economic development, CG

legislation is needed to organize the connections

between all stakeholders. These regulations define

the responsibilities and duties of all stakeholders

who contribute to the firm's aims and plans, and the

rights of all stakeholders interested in the firm,

[16], [17]. However, the Arab Spring, tribalism,

and favoritism were the principal impediments to

CG serving as deterrent mechanisms for activating

the monitoring and controlling duties of these

mechanisms in Jordanian enterprises. Furthermore,

little emphasis has been placed on the association

of CG with earnings quality in Jordan, [11], [18].

Therefore, issues related to CG and earnings

quality in Jordan need further examination, and the

mechanisms of CG have not been well investigated

in previous studies, such as the board of directors

(BOD) and audit committees (AC) in the Jordanian

context.

BOD and ACs are monitoring mechanisms that

may affect earnings quality and FRQ, [3], [19],

[20], [21]. Investigating the board of director-audit

committee relationship, as well as how such tools

could affect the earnings quality of the various

firms is considered an important topic in the current

changing economics. Thus, this study investigates

the effect of CG mechanisms, (namely; the board’s

components and AC’s components) on the quality

of the earnings in the Jordanian market. In addition,

the current research utilized the performance-

matched model to discover the discretionary

accruals levels in the study’s sample. This model

has been presented by the study of [22] in order to

discover the earnings management practices. The

adopted Kothari model possesses a significant

ability to discover EM practices. Furthermore, it is

widely used in prior studies that investigate the EM

practices among the various firms, [23].

2 Literature Review

This part of the study shows the research’s

literature review, related prior studies, an

explanation importance of the earnings quality

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(EQ), CG tools (board’s components and AC’s

components), as well as the association of such

topics. Furthermore, this part of the study shows

the hypotheses development based on the agency

theory.

2.1 Earnings Quality

Preparing the financial statements is considered as

the most important function in the accounting

profession. The main goal is to provide the needed

data in order to evaluate the performance and

earnings of the companies. Such data and reports

have to be presented in a way that the related

parties can understand and determine the real

earnings levels of the company, [24]. Net profit in

the income statement is an essential pillar in

evaluating the performance and profitability of any

firm, and because the net profit is made using the

accrual basis, it is influenced by estimates and

various accounting methods as well as the

possibility of manipulating the reported profit.

Therefore, EQ in the final financial reports is one

of the most critical research areas, [25], [26].

The issue of EQ has always been an important

topic of interest among all related parties and the

accounting and auditing profession itself, [27]. The

study of [28] considered EQ as an ability of the

reported statements to provide vital information

regarding the organizations’ performance, which is

associated with an economic decision taken by the

specific decision-makers, and to help future

decision-making. Nevertheless, there have been

multiple instances of changing and manipulating

profits to alter the real picture of a company's

economic success, [29]. The differences in

information access between owners and agents can

lead to opportunistic actions by management,

thereby influencing the level of the EQ.

Suitable CG mechanisms are expected to have

an essential impact on EQ within the firm context.

In addition, CG mechanisms play a crucial role in

EQ, [30]. Moreover, management prepares the

financial statements for the principals and other

users to assess their stewardship function; the

principals, in turn, use the information in the

financial statements to reward management.

However, utilizing earnings in financial statements

in several contractual agreements can motivate EM,

which may lead to a lower quality level of reported

earnings, [31].

Opportunistic managers can manipulate

earnings through two approaches: the accounting

choices approach through legal and illegal

transactions and operations decisions, [32]. The

EM achieved by the operating-decision approach is

difficult to detect because it requires particular

information. Therefore, existing studies have

focused on the accounting choice approach. Such

EM practices can lead to long-term negative

consequences. Previous accounting and financial

scandals have shown that EM activities can even

threaten a firm’s existence. Thus, it is critical to

discover and restrict EM, [33].

2.2 Boards of Directors and Earnings

Quality

The most important feature of the board in the

context of an agency perspective is the members’

independence from the firm's management, [34].

Independent members are experts in decision-

making [35], and they do not possess financial or

personal interests in the firm or close ties with

management, [36], [37]. Consequently,

independent board members possess a good

position to observe and monitor management

objectively and protect the interests of shareholders

and firm value, [21].

In addition, a firm's practical and active BOD

can strengthen and enhance the FRQ and

transparency of the disclosure. More specifically, it

can be concluded that expert members in

accounting or financial issues benefit from the

BOD to better understand the financial reporting

process. By possessing such expertise, directors

will be able to identify misstatements or errors in

financial statements, and management will be

hesitant to manipulate or adjust financial statements

for their self-interest, [38].

On the other hand, directors’ remuneration has

received increasing attention and continuous

investigation by researchers, the public, and

regulators in several fields, for instance;

management, accounting, psychology, and human

resources, [39], [40]. Remuneration refers to every

form of salary, reward, bonus, and allowance given

to employees or directors [41], [42], such as salary,

bonus, stock appreciation rights, stock options, and

stock awards. Remuneration involves motivating

directors to do their jobs. The definition of

remuneration based on agency theory cost suggests

that shareholders should pay directors to run the

firm, owing to the separation between the

management and the ownership in the companies,

[43].

Previous studies have investigated the

association between BOD and EQ. Study of [44]

argue that an independent board is more effective

in monitoring and control the managers’ actions. In

addition, In addition, study of [45] revealed that

independent directors are a prerequisite for

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protecting a firm's interests. Similarly, the research

by [32] show that independent directors play a

significant role in reducing EM. [46], showed that

the independent board has a significantly negative

impact on EM. In contrast, study of [47] indicated

that director independence possesses insignificant

impact on EM activities, and [38] shows that board

expertise is positively correlated with EM practices.

[48], found that the directors' expertise was

positively associated with real EM. The studies of

[49] and [50] revealed that the directors’ expertise

has an insignificant association with EM practices.

However, limited studies have been carried out

on the issue of directors’ remuneration with EQ and

EM. [51], revealed that directors' remuneration has

no relationship with a firm's profitability (ROA).

Also, [52] showed that there is no relationship

between the remuneration of the directors with

accounting fraud. [53], revealed that there is an

insignificant association between director

remuneration and EM. [54], revealed an

insignificant association between the directors’

remuneration and financial performance, ROA, and

ROE. [55], showed that remuneration does not

significantly influence EQ. Thus, this study

proposes the hypotheses as follows:

H1a: The Board’s expertise has a positive

influence on the firms’ earnings quality.

H1b: Board independence has a positive

influence on the firms’ earnings quality.

H1c: Directors’ remuneration positively

influences earnings quality.

2.3 Audit Committee and EQ

Several prior studies have focused on some

effective AC characteristics, for instance, AC

independence, the expertise of its members, and its

activity due to the monitoring effectiveness and

competence of these characteristics in improving

quality levels of the financial statements. In

addition, such characteristics lead to more effective

AC performance, [56], [57], [58], [59]. In addition,

it is widely believed that independent ACs provide

adequate oversight over the financial discretion of

management and can ensure the quality and

reliability of financial reports, [60]. The primary

function of the AC is to ensure the reliability and

quality of a firm's financial reporting. Several

parties blamed and criticized the audit committees

for failing to fulfil their duties regarding financial

reporting monitoring due to independence issues,

[61]. However, there is inconsistency in the prior

studies regarding the association of independent

ACs for detecting and preventing EM practices.

Study of [62] reveals that AC meetings

negatively and significantly affect discretionary

accruals. [63], show that AC diligence has a

significant and inverse influence on EM practices.

[46], [57], [64] and [65] showed that the meetings

of the AC members possess a significantly negative

influence on EM. [60], concluded that the AC,

which includes most independent members,

reduces the EM practices. [63] showed that AC

independence possesses a significantly inverse

impact on EM practices. Similarly, [57], [65] and

[66] find that AC independence has a significant

and negative effect on EM activities. Such findings

support the outcomes of the Sarbanes-Oxley Act

(2002), which emphasizes the complete

independence of ACs. Moreover, [60] showed that

members' expertise in AC is associated with a low

level of EM practices. [63], found that AC

members’ expertise has a significantly inverse

effect on EM practices. [57], [65], [67] and [68]

concluded that the expertise of the AC’s members

has a significant and negative influence on EM

activities. Similarly, [59] and [64] showed that AC

expertise reduced EM levels. [69] and [70] found

that the experience of the AC members

significantly and negatively affects discretionary

accruals. Thus, based on the previous discussion

and according to the predictions of Agency Theory,

the current study formulated the following

hypotheses:

H2a: AC activity positively influences earnings

quality.

H2b: AC expertise positively influences earnings

quality.

H2c: AC independence positively influences

earnings quality.

3 Methodology

The population of the current research involves all

Jordanian-listed companies in the Amman Stock

Exchange (ASE), covering the period (years) from

2015 to 2021 (due to the reforms on the CG

systems conducted in 2015). There were 221 listed

companies in the ASE at the end of 2021. At the

same time, the sample contains all non-financial

companies that disclose their information regarding

the boards of directors, ACs, and earnings quality.

The total of non-financial companies in ASE at the

end of 2021 was 117 companies. Financial

companies are excluded because of the business

differences and unique regulatory environments.

The sample also excludes listed companies with

missing information. The final sample was 94 non-

financial companies (658 observations), and it will

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be distributed over the industrial and service

sectors.

The independent variables in this research are

represented by CG mechanisms, namely, the board

of directors' components (board expertise,

independence, and directors’ remunerations) and

characteristics of AC characteristics (AC

Independence, AC Expertise, and AC Activity).

Board expertise is measured by the percentage of

members with accounting and financial experience.

Board independence is measured by the percentage

of members who do not belong to the company.

Remunerations are measured by the LN of the total

amount of remunerations received by the members

on the board. The independence of AC members is

measured by the percentage of members who do

not work at the company. The expertise of the AC

members is measured by the percentage of

members with accounting and financial experience,

and finally, AC activity is measured by number of

the meetings conducted in the specific year. These

variables were measured as shown in Table 1.

Table 1. The Variables’ Measurement

Variable

Measurement

Board expertise

% of directors who have accounting

or financial qualification

Board

independence

% of non-executive members

Directors’

remuneration

LN of remuneration and bonuses

paid out to directors.

AC

Independence

% of non-executive directors of AC

AC Expertise

% of members who have accounting

or financial qualifications on AC

AC Activity

Number of AC meetings

EQ represents the dependent variable in the

current research. Previous studies primarily used

measurements of the EQ that were designed to

detect opportunistic EM. The most frequently used

proxies are based on several models, for example,

Healy's model (1985), DeAngelo’s model (1986),

Jones (1991), Modified Jones’s model (1995), and

the Performance Matched model, [22]. The current

research utilizes the discretionary accruals (DACC)

level to measure EQ (earnings quality) based on a

performance-matched model. This is based on the

basic assumption that the DACC captures the EM

practices, and an inverse measurement is provided

for earnings quality. Thus, low levels of DACC are

expected to indicate high earnings quality, [62],

[71]. The data required to calculate DACC based

on Kothari’s model are shown in the following

equation:

TACCit/TAit-1= β0 + β1(1/TAit-1) + β2(ΔREVit –

ΔARit)/TAit-1 + β3(PPEit/TAit-1)+ β4ROAit-1 +

εit

Where:

TACCit: Total Accruals (company i, year t)

TAit: Total assets (company i, year t-1)

ΔREVit: Revenues in the year t less revenues in t-1,

company i,

ΔARit: Changes in the Accounts Receivable,

PPEit: Property, Plant, and Equipment,

ROAit: Return on Assets,

εit: Residual from the regression.

Therefore, the current study indicates that the

DACC designates EM and can be used as a proxy

for EQ. More specifically, this research focuses on

the negative side of EM/DACC and follows the

view that EM is undesirable, as it is considered an

additional cost to investors, stakeholders, and

others. Hence, this study measures earnings quality

as the level of EM in the firm, since low levels of

EM indicate high EQ levels.

The DACC level is the residual of the above

model, it is the difference between the total

accruals (TACC) deflated by TAit and the non-

discretionary accruals (normal accruals) estimated

by the fitted values of the above equation. In this

regard, TACC is the difference between the net

income before the extraordinary items and

operating cash flows resulting from cash flows:

DAcc=TACCit/TAit-1 -[β0+ β1(1/TAit-1)+

β2(ΔREVit–ΔARit)/TAit-1+ β3(PPEit/TAit-1)+ β4

ROAit-1

As mentioned, the independent variables in this

study consisted of two categories. First, the

components of boards of directors, namely; (board

expertise, board independence, and directors’

remuneration). Second: audit committee (AC)

characteristics, namely; (AC Independence, AC

Expertise, and AC Activity). The dependent

variable was the EQ. In addition, this study utilized

several control variables – to avoid

misspecification in the model – such variables

might potentially impact the dependent variable,

namely, Firm Size, Firm age, AC size, board size,

and loss. Thus, this study establishes the following

model/equation:

EQ = þ0 + þ1Bdind + þ2Bdexp + þ3Rem + þ4ACInd

+ þ5ACExp + þ6ACActivity + þ7Fsize + þ8Fage +

þ9ACsiz + þ10Bdsiz + þ11Loss + E

Where:

EQ: Earnings quality

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Bdind: Board independence

Bdexp: Board expertise

Rem: Directors’ remunerations

ACInd: AC Independence

ACExp: AC Expertise

ACActivity: AC Activity

Fsize: Firm Size

Fage: Firm age

ACsiz: AC size

Bdsiz: Board size

E: error term.

Finally, based on prior studies, the current

research indicates that the DACC reflects EM

practices and can be used as a proxy for the EQ.

That is, this research focuses on the negative

aspects of EM practices and adopts the perspective

that EM practices are undesirable because they are

costly to shareholders. The central assumption is

that the DACC captures EM activities and provides

an inverse proxy for EQ. Consequently, whenever

the independent or control variables possess a

negative impact on EM, they imply a positive

influence on EQ and vice versa in case of a positive

impact.

4 Discussion of the Results

4.1 Descriptive Statistics

Table 2 (Appendix) shows the descriptive statistics

for the study variables. As shown in Table 2

(Appendix), the mean of the Earnings management

(dependent variable) is -0.035. The minimum (Min)

and maximum (Max) of the EM vary between -

0.594 and 0.763, respectively. Given that

discretionary accruals are considered a

measurement of EM, such results are considered an

indicator that some Jordanian companies are

involved in EM activities, while others are not. The

mean of AC Activity (ACact) is 3.9, varying

between 0 to 10; AC Expertise (ACexp) is 0.43,

varying between 0 to 1; and AC Independence

(ACind) is 0.42, varying between 0 to 0.88.

Meanwhile, the mean of board expertise (Bdexp) is

0.39, board independence (Bdind) is 0.49, and

directors’ remuneration (Rem) is 9.5 in terms of

natural logarithm.

4.2 Correlation

The correlations of the various variables, namely;

the independent variables (IV), the control

variables (CV), and the dependent variable (DV),

as well as the correlations significance, are

presented in Table 3 (Appendix). The findings

reveal that the correlation between all study

variables was low (<0.8); study of [72] pointed out

that the general threshold of harmful

multicollinearity is (±0.8); thus, as seen in the table,

a high correlation does not exist between the

variables. Therefore, no issues arise.

4.3 Testing of the General Assumptions

This section contains some important assumptions

to examine the validity of the data for the analysis.

These assumptions are Multicollinearity through

the Variance inflation factor, heteroscedasticity

assumption, and serial correlation assumption.

4.3.1 Multicollinearity

Variance inflation factor (VIF) test was adopted in

the current research to examine the issue of

multicollinearity. VIF is a popular test for

examining collinearity among variables, [73]. As

seen in Table 4, the VIF results revealed that the

variables’ values under investigation were less than

the ideal conditions of VIF < 3, [74], indicating that

the current research had no issues regarding the

multicollinearity.

Table 4. Variance inflation factors

Variable

Centered VIF

AC_ACT

1.115

AC_EXP

1.041

AC_IND

1.025

BDEXP

1.335

BDIND

1.320

LNREM

1.107

BDSIZ

1.377

AC_SIZE

1.017

COMPANIESIZ

1.495

FAGE

1.105

LOSS

1.120

C

NA

4.3.2 Serial Correlation and Heteroscedasticity

Assumptions

Regression models must have no serial correlation

or heteroscedasticity, [73]. This research utilized

Breusch-Pagan–Godfrey’s LM test to examine

whether heteroscedasticity or serial correlation

exists. Table 5 (Appendix) shows no issues

regarding heteroskedasticity because the p-value of

the heteroskedasticity test was found to be

insignificant (0.472). The results presented in Table

5 (Appendix) show that the p-value of the serial

correlation problem is insignificant (0.236).

Therefore, no issues regarding serial correlations

were identified in this research.

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4.4 Results

As mentioned, the DACC is utilized to measure the

EM activities, in which an inverse measurement is

provided for the quality of earnings. Thus, if the

independent or control variables are found to

possess a negative impact on the DV (EM), they

indicate a positive influence on EQ, and also vice

versa if they possess a positive effect. Table 6

(Appendix) shows the effects of CG mechanisms

on the EQ. The results in Table 6 (Appendix)

reveal that among the AC characteristics, AC_ACT

(AC Activity) and AC_EXP (AC Expertise) have

significantly negative effects on EM, which reflects

that these variables have significantly positive

effects on EQ. Thus, H1a and H1b were accepted.

Meanwhile, AC_IND (AC Independence) is found

to possess an insignificant impact on EM and H1c

was rejected. These results indicate that active audit

committees and expert members on the audit

committees lead to high levels of earnings quality

and low levels of DACC. Such results have been

reported by various prior studies, such as [10], [46],

[60], [62], [63], [65] and [68].

In addition, among the board components,

BDEXP (board expertise) with BDIND (board

independence) have significantly negative effects

on EM, as seen in Table 5 (Appendix), which

indicates that these variables have significantly

positive effects on EQ. Thus, H2a and H2b were

accepted. These results indicate that expert and

independent board members lead to high earnings

quality levels and reduced EM levels in Jordanian

companies. Several prior studies have reported the

same findings, such as [32], [44], [45] and [46].

Finally, regarding directors’ remuneration

(LN_REM), the results revealed that there is an

insignificant effect of LN_REM (directors’

remuneration) on EM, and thus, H2c is rejected.

Many previous studies have also supported this

result; for example, [52], [53], and [55].

The main points of the current study can be

summarized as follows; discretionary accruals are

widely adopted and employed as an indicator for

earnings management practices. It is also

considered an inverse measurement of the earnings

quality. In this study, results showed that the active

audit committee and the experience level of the

members of the audit committee possess an

important role in preventing earnings management

activities and in turn, enhancing the quality level of

the firm’s earnings. Through reducing the

discretionary accruals. Furthermore, more

experienced level and independent members on the

firm’s board also possess an important function in

preventing discretionary accruals and earnings

management practices taken by the management.

Which in turn, lead to improve the quality level of

the firm’s earnings in the Jordanian companies.

5 Conclusions

Investigating the influence of CG mechanisms,

such as BOD characteristics and AC features, on

EQ in developing countries (particularly Jordan) is

important for several reasons. For instance,

understanding how CG practices impact EQ helps

to build investor confidence. Healthy governance

practices signal transparency, integrity, and

accountability, which can attract investors and

maintain trust. Additionally, high-quality earnings

are crucial for accurate financial reporting. Strong

CG mechanisms ensure that reported earnings

reflect the actual performance of the company,

reducing the likelihood of misstatements or

manipulation.

This research provides valuable insights with

significant recommendations to guide

policymakers, regulators, and companies in

implementing and improving CG practices,

enhancing the overall economic environment, and

fostering sustainable growth. The findings reveal

that board expertise, board independence, AC

Activity, and AC Expertise have significantly

negative effects on EM, reflecting that these

mechanisms significantly and positively affect EQ

in a unique Jordanian environment. These four

characteristics are essential in CG practices to

enhance Jordanian companies’ earnings quality.

This supports - in turn - the predictions of agency

theory [75], which assumes that the influential role

played by the BOD and AC can deter agents from

malpractices, which also improves quality level of

the earnings. Although the findings showed that

AC Independence and directors’ remuneration have

an insignificant effect on EM, the other factors

significantly support these notions in the Jordanian

environment.

This study has several implications. For

instance, it indicates that policymakers in Jordan

need additional support and enhancement regarding

CG mechanisms, particularly in a transitioning

economy (Jordan), to attract more investments.

Thus, the Government in Jordan must raise

awareness of the importance of CG mechanisms

among investors, companies, and shareholders by

introducing significant CG codes. Moreover,

practitioners and policymakers in the market could

use the outcomes of this research to address EM

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2024.21.153

Fahid Ali Younis Freihat, Mohd Rizuan Abdul Kadir,

Khairul Anuar Kamarudin, Raedah Sapingi

E-ISSN: 2224-2899

1883

Volume 21, 2024

practices and enhance the implementation of CG

mechanisms.

Beyond the contribution of the current study to

the prior studies, it provides valuable and essential

outcomes for regulatory bodies to consider earnings

management activities, helps investors in decision-

making, and provides an additional understanding

and explanation of the significant role played by

CG regime in Jordan. CG mechanisms are crucial

given that they establishes a set of rules and

policies that regulate how the firms runs and align

with the interests of all related parties. Strong CG

mechanisms promote ethical business practices,

resulting in financial viability. This research, in

addition, extends the explanation of the association

between CG mechanisms and earnings quality. In

addition, there is a need for more research to

investigate whether the various mechanisms of CG

(internal and external mechanisms), such as

ownership structure or external audit

characteristics, would lead to high or low levels of

EM activities in weakly protected contexts for

investors. The population in the current research

consists of non-financial firms, and future studies

could conduct this research using financial firms.

The future studies could also investigate the

motives behind EM activities among Jordanian

companies.

Acknowledgement:

The authors are gratefully acknowledged the

valuable comments and reviews receive from the

editor and reviewers.

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Contribution of Individual Authors to the

Creation of a Scientific Article (Ghostwriting

Policy)

All authors are equally contributed to the current

study at all stages.

Sources of Funding for Research Presented in a

Scientific Article or Scientific Article Itself

No funding to report for this research.

Conflicts of Interest

The authors declare no conflicts of interest.

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(Attribution 4.0 International, CC BY 4.0)

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Creative Commons Attribution License 4.0

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APPENDIX

Table 2. Descriptive statistics

EM

acact

acexp

acind

bdexp

bdind

ln'rem

bdsiz

acsize

loss

fage

companiesiz

Mean

-0.035

3.922

0.432

0.425

0.387

0.487

9.518

8.021

3.491

0.325

2.523

10.264

Med

-0.024

4

0.4

0.346

0.556

10.221

8

3

0

2.639

10.204

Max

0.763

10

1

0.889

1

0.786

12.583

14

6

1

3.584

14.394

Min

-0.594

0

4

0

0.693

5.979

Obs

658

Where: EM (Earnings management), acact (AC Activity), acexp (AC Expertise), acind (AC Independence), bdexp (board’s

director's expertise), bdind (board’s director's independence), ln'rem (remunerations), companiesiz (Firm Size), fage (Firm age),

acsize (AC size), and bdsiz (Board size).

Table 3. Correlation matrix

em

acact

acexp

acind

bdexp

bdind

lnrem

bdsiz

acsize

companiesiz

fage

loss

em

1

acact

-0.115

1

0.003

acexp

-0.112

-0.003

1

0.004

0.930

acind

0.045

-0.021

-0.002

1

0.251

0.583

0.955

bdexp

-0.390

0.064

0.071

-0.015

1

0.000

0.103

0.068

0.703

bdind

-0.385

0.077

0.044

0.021

0.464

1

0.000

0.049

0.263

0.584

0.000

lnrem

0.011

-0.043

0.025

-0.065

0.047

0.009

1

0.779

0.268

0.520

0.094

0.233

0.819

bdsiz

-0.045

0.178

0.038

-0.118

0.070

0.096

0.201

1

0.245

0.000

0.326

0.003

0.071

0.014

0.000

acsize

-0.036

0.020

0.042

0.050

0.041

-0.009

-0.031

-0.004

1

0.355

0.604

0.277

0.200

0.294

0.817

0.435

0.927

companiesiz

-0.018

0.290

-0.119

-0.109

0.060

-0.025

0.066

0.437

0.049

1

0.640

0.000

0.002

0.005

0.123

0.530

0.089

0.000

0.212

fage

0.046

0.065

-0.002

-0.004

-0.093

-0.035

0.145

-0.041

0.056

0.180

1

0.243

0.097

0.968

0.927

0.017

0.369

0.000

0.296

0.151

0.000

loss

0.289

-0.007

-0.063

0.022

-0.205

-0.162

-0.140

-0.033

-0.063

-0.169

-0.066

1

0.000

0.867

0.109

0.569

0.000

0.398

0.108

0.000

0.091

Table 5. Serial Correlation and heteroscedasticity tests

Test

P-Value.

Result

The Serial Correlation

Chi-Square = 0.236

No serial correlation

The Heteroskedasticity

Chi-Square = 0.472

Homoskedasticity

Table 6. Regression analysis of the impact of CG mechanisms on EQ

Variable

Coefficient

Std. Error

t-Statistic

P Value

AC_ACT

-0.007

0.003

-2.578

0.010

AC_EXP

-0.033

0.017

-1.950

0.052

AC_IND

0.026

0.019

1.404

0.161

BDEXP

-0.114

0.019

-5.860

0.000

BDIND

-0.137

0.023

-6.037

0.000

LN_REM

0.002

1.362

0.174

BDSIZ

0.000

0.002

-0.095

0.924

AC_SIZE

-0.002

0.005

-0.445

0.657

COMPANIESIZ

0.004

1.088

0.277

FAGE

0.004

0.007

0.611

0.541

LOSS

0.058

0.010

5.950

0.000

C

0.022

0.045

0.496

0.620

R-squared

0.263

Mean dependent var

-0.035

F-statistic

20.919

Durbin-Watson stat

1.350

Value(F-statistic)

0.000

DV

EM

WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2024.21.153

Fahid Ali Younis Freihat, Mohd Rizuan Abdul Kadir,

Khairul Anuar Kamarudin, Raedah Sapingi

E-ISSN: 2224-2899

1889

Volume 21, 2024