Corporate Governance Mechanisms and Their Influence on Earnings Management Practices

Abstract

This study aims to comprehensively review the relationship between corporate governance mechanisms and earnings management practices through a literature review approach. Effective corporate governance is believed to reduce managerial incentives to manipulate financial reporting, which may mislead stakeholders. This research analyzes key dimensions of governance, such as board structure, institutional ownership, and the effectiveness of audit committees, to assess their influence in limiting earnings management behavior. Based on a review of several journal articles published, the findings indicate that strong governance mechanisms are consistently associated with a significant reduction in earnings management, both accrual-based and real activities-based. Although contextual variations exist across countries and industries, empirical evidence shows that an active board, independent and competent audit committees, and the presence of institutional investors serve as critical factors in curbing opportunistic managerial behavior. The results of this review are expected to provide theoretical insights and practical implications for regulators, academics, and business practitioners in strengthening governance frameworks and improving the quality of financial reporting.