The effect of corporate governance practices on earnings management: Evidence from private insurance companies in Ethiopia

What the paper says

Earnings management in the insurance sector has become a critical issue following several high-profile corporate bankruptcies. This research examined the effect of corporate governance practices on earnings management through discretionary loss reserve accrual, using panel data from 11 selected Ethiopian private insurance companies for the period 2015 to 2022. The study employed a quantitative research approach and an explanatory research design. The study is crucial given the lack of research on insurance earnings management in Ethiopia. Based on the random effect regression model, the study finds that board size, Chief Executive Officer (CEO) duality, board meeting frequency, and board gender diversity are significant and negatively associated with earnings management. Additionally, the study finds a negative and significant relationship between audit committee financial expertise, internal auditors' educational background, and financial leverage with earnings management. Conversely, firm size is positively and significantly associated with earnings management. The study contributes to the understanding of the relationship between board characteristics, audit committee characteristics, internal audit quality, and earnings management in insurance companies, which has been less explored in prior studies. Based on the findings, the researcher concludes that the board of directors’ characteristics and the internal audit quality of a company play more significant roles than other variables in mitigating earnings management. Future research could examine how different corporate governance factors and their interactions impact earnings management. Key words: Corporate governance, discretionary loss reserve accrual, earnings management, Ethiopia, insurance companies.