An analysis of corporate governance, earnings quality and stock returns of listed companies on the stock exchange of Thailand

Abstract

This research aimed to examine the relationship between corporate governance and ownership characteristics, earnings quality, and stock performance in the Stock Exchange of Thailand (SET). This research was undertaken because of the insufficient information available on the roles of corporate governance on SET despite of a rapidly improving corporate governance regime in Thailand since 2002. This research was conducted using structural equation modeling (SEM), with data including non-financial firms listed on the SET (2014 to 2015) (n = 255 firm-years). The corporate governance study focused on board characteristics, including board size, board independence, CO duality, gender diversity, meeting frequency, and CEO compensation. Moreover, ownership structure was studied using institutional ownership, ownership concentration, and family ownership. On the other hand, stock returns were modeled as average return, while earnings quality was measured using the modified Jones (1991) model of discretionary accruals. Regression analysis was used to test direct effects of board structure on earnings quality (H1), ownership structure on earnings quality (H2), board structure on stock returns (H3), ownership structure on stock returns (H4), and earnings quality on stock returns. Results indicated that meeting frequency and institutional ownership had an effect on earnings quality, while gender diversity and institutional ownership had an effect on stock returns. Apart from this, earnings quality did not influence stock returns. Mediating effects of earnings quality, however, were also examined for the relationships of board structure and stock returns (H6) and ownership structure and stock returns (H7). In general, most relationships showed some mediation but in all cases this was small (<20% mediated at most).