Board Independence, CEO Duality and Accrual Management: Malaysian Evidence

This paper focuses on two important characteristics of board effectiveness: (1) the proportion of independent non-executive directors; and (2) CEO Duality. The objective of this study is to examine whether the presence of a majority of independent non-executive directors and the separation role between chairman and CEO, as recommended in the Malaysian Code on Corporate Governance (MCCG) 2000, effectively constrains the incidence of earnings management as measured by income-increasing and income-decreasing discretionary accruals. Using data from the top 200 non-financial companies listed on Bursa Malaysia’s Main Board and Second Board for the year 2004, this study finds a positive significant result of board independence when firms undershoot target earnings. Although contradictory to the prediction of agency theory, the results show that a higher proportion of independent non-executive directors is associated with higher income-increasing earnings manipulations. Neither board independence nor CEO Duality was found significant in other models tested regarding income-increasing and income-decreasing earnings management. The results of this study cast doubt on the notion that the independence of directors and the role separation between the chairman and the CEO reduces the incidence of earnings management activity, especially with highly concentrated ownership as is typical in Malaysia.