Measuring Quality of Earnings Response to Corporate Governance Reforms in Russia

Abstract:     
This paper investigates the earnings management response to Russian Corporate Governance reforms during the year 2002 when corporate governance codes were introduced. We study the effect of these codes on the earnings management practices of Russian companies. The event-study analysis is carried on employing cross-sectional Jones (1991) Model to detect the earnings management in both periods. Our null hypothesis of 'No Earnings Management in event-period' is rejected; however, the analyses highlight a decline in the use of absolute discretionary accruals during the reform period. We also found that companies' compliance with IAS/USGAAP is significantly affecting the discretionary powers of the managers of these companies. International accounting standards and USGAAP provide clear indication of no earnings management in the subsequent firm-year. Both cross-sectional and panel data models show positive (inflating) abnormal accruals in Ferrous Metal industry and negative (deflating) abnormal accruals in Telecom industry. Whereas, Oil & Gas and power industries are more transparent in disclosing earnings in terms of managerial discretionary powers of using firm's earnings. We found significantly lower absolute earnings management in these industries that represents better shareholders' rights. The results are robust in favour of obvious earnings management practices in Russia during 1998 to 2003. However, we do not neglect the positive impacts of reforms that have urged the management to use more transparent methods to disclose actual performance but full impact is yet to happen when high concentrated ownership and insider trading exists. More targeted and refined codes are needed to overcome the excessive discretionary power problem in Russia.

Keywords: Earnings management, Corporate Governance, Accruals, Cash flow

JEL Classifications: G30, G34, G38

Working Paper Series