The effect of corporate governance mechanisms on earnings informativeness through earnings persistence: Empirical evidence from Thailand

Abstract

The concept of this study was developed on the basis of the agency theory. This research aimed to study the causal relationship between corporate governance mechanisms and earnings quality which were consisted of four main objectives including 1) to investigate the direct effect of corporate governance mechanisms on earnings persistence, 2) to explore the direct effect of corporate governance mechanisms on earnings informativeness, 3) to examine the direct effect of earnings persistence on earnings informativeness, and 4) to study whether corporate governance mechanisms had any indirect effect on earnings informativeness. In this study, corporate governance was measured by board characteristics, ownership structure and shareholding, executive compensation, transparency and disclosure whereas earnings quality was determined by earnings persistence and earnings informativeness. The secondary data obtained from 418 listed companies on the Stock Exchange of Thailand during 2010-2012 with the accounting period beginning on 1st January and ending on 31st December were employed in this study. The samples were companies from all industrial groups except the companies in financial and securities businesses, banking and insurance businesses, and companies under rehabilitation. The data were analyzed by means of Multiple Linear Regression at the statistical significant level of 0.05. The findings revealed that corporate governance mechanisms in the aspect of executive compensation and foreign ownership had negative direct effects on earnings persistence while institutional ownership had positive direct effect on earnings persistence. Transparency and disclosure, family’s shareholding had positive direct effect on earnings persistence whereas board meeting had negative direct effect on earnings persistence. The earnings persistence had direct effect on earnings informativeness. Moreover, the results pointed out that corporate governance mechanisms had an indirect effect on earnings informativeness through earnings persistence. Therefore, corporate governance mechanisms had both direct and indirect effects on earnings informativeness. The study indicated that solid corporate governance mechanisms, especially high level of transparency and disclosure, could lead to increasing of earnings persistence and the increase of earnings persistence could significantly lead to high level of earnings informativeness.