After defining this study`s framework,this section discusses the relationship between independent and the dependentvariables to formulate this study`s research hypotheses.
This section discussesthe association between the four groups of independent variables highlightedabove (i.e., board characteristics, audit committee characteristics, ownershipstructure and company attributes) and earnings management measured bymanipulation of real activities. In addition, the moderating impact ofmanagerial ownership on relationshipbetween corporate governance and management of earnings is presented in thissection.Hypothesis is a tentative statement of theassociation between two or more variables, which are constantly in the form ofsentences that function as directors for examination in the entire procedure ofthe research work. The following hypotheses are developed to examine whetherall the independent variables will predict the dependent variable and whethermoderating variable can affect their relationship. Recent evidence shows thatthe fundamental problem of earnings management need proper investigation (Cohenet al., 2008; Kang & Kim, 2012).
This study introduces managerial ownershipas moderating variable to examine what kind of relationship exists between realmanagement earnings as well as the corporate governance attributes 3.3.1 TheSize of the Board and Earnings ManagementThesize of the board is believed to be the elementary aspect of the effectivedecision making. Vafeas (2005) suggested that the size of the board and performance of the board had a non-linearrelationship. Too small and too large of board size is likely to make itineffective.
Lipton and Lorsch (1992) recommended that the ideal board sizeshould not exceed eight or nine directors. Jensen (1993) claimed that when theboard is more than seven or eight members, it is less effective because of thecoordination and process problem, which in turn adds to weak monitoring. However,there has been a myriad of studies conducted on the relationship between sizeof the board and the management of earning. Amran, Ishak, andAbdul-Manaf (2016) found that board size has negative effect onearning management, indicating that board size could curb the real activitiesin the companies. Likewise, Obigbemi et al. (2016), in their research on boardsize-earning management relationship, with focus on 137 quoted companies inNigeria found negative significant relationship between the size of the board andthe management of earnings. It is argued that there is need for enforcement ofthe rule on large board size, and that a board size of five may not beappropriate; thus, the minimum board size should be increased.
Additionally,Iraya et al. (2015) found that earnings management is negatively related toboard size. Patrick et al. (2015) in their findings reveal that board size, hassignificant influence on the practices of earnings management.In Jordan context, Abbadi, Hijazi andRahahleh (2016) explores effects of thequality of corporate governance on the management of earnings practices inJordan. The study employs five-year financial data ranging from 2009 – 2013obtained from listed firms in Amman Stock Exchange (ASE). Using panel dataanalysis, the study found that there is negative significant relationshipbetween the size of the board as well as management of earnings.
On similarnote, Abed, Al-Attar and Suwaidan (2012) examined the relationship between the sizeof the board and the management of earnings. This current study uses sample ofnon-financial organization in Jordan for four years ranging from 2006 –2009. They found out that the size of board of directors has negativesignificant relation with earnings management. On the other hand, previous studies reportpositive results on the correlation between board size and earnings management.For example, Rahman and Ali (2006); Gonzalez and Garcia-Meca (2014) examinedthe effect of board size on the earnings management and that size of the boardis positively associated with earnings management activities. Consequence,large size board is less likely to yield fruitful discussions as there would betoo many members attempting to share their opinions. As a result, meetings ordiscussions become more time consuming and reaching crucial decision will bemore challenging. Furthermore, decision making is slow in large board and thereis also high-risk aversion.
Moreover, members in large-sized board also havethe tendency to depend on other members in safeguarding the environment. Allthese are the reasons why large boards have lower level of success.Nonetheless, the problem of board overcapacity still occurs, and this is due tochanges in physical and management technology and also in organizationalpractices (Jensen, 1993).An opposing viewpoint is the management ofearnings drops with larger size of the board. Firstenberg and Malkiel (1994)claimed that, the smaller boards size have the inability of achieving theirstated objectives of generating a numerous viewpoints and challenging theauditors on certain matters reportage. In addition, the constraint in relationto size can limit the experience of the members of the board.
Increasing the sizeof the board also lead to an increases in the possibility of including certainnumber directors on the board with relevant knowledge in financial reportingand auditing experience (Beasley & Salterio, 2001).Although research findings onrelationship between the size of board as well as that of the management ofearnings is mixed, and not been proven empirically, majority of the studiesindicate negative relationship. That because, the selection ofboard size is based on the statements of agency theory regarding therelationship between owners and corporate managers. The relationship between thesize of the board and earnings management has been explained with the assistanceof agency theory since large board size are expected to have more experts,additional information to decrease information asymmetry in view of corporatemanagers being more inform than other stakeholders (Jensen & Meckling,1976).Agencytheory postulates the monitoring role of the boards to minimize or mitigateagency problem.
Bigger boards are more capable of committingtheir time and effort on management oversight and the consequent minimalizedagency problem, but small boards are more susceptible to failure in detectingearning management (Monks & Minow, 2011). Giventhis and underpinned by agency theory, thecurrent study, therefore, holds that there are the larger the size of theboard, the better the mechanism of mitigating earnings management practices,and thus postulates below hypothesis:H1: There is anegative relationship between the size of board, and management of earnings inlisted industrial and service firms in Jordan.