National corporate governance, GMI ratings and earnings management: A country level study

Purpose The purpose of this paper is to assess the association between country-level corporate governance and earnings management (EM). It aims to investigate whether the Governance Metrics International (GMI; acquired by Morgan Stanley Capital International in 2014) rating for national corporate governance on a country level is a significant explanatory variable for the country-level EM score or otherwise. Design/methodology/approach In a sample of 280 country-year observations during the period from 2000 to 2009, the paper measures national corporate governance quality using GMI ratings scores and whether the corporate governance model is Anglo Saxon or otherwise. Findings The findings of this study show that corporate governance is a significant indicator of lower EM levels in a country. Practical implications Corporate governance rating firms play a vital role in public markets. GMI provides country-level corporate governance ratings to assess the quality of corporate governance in several countries. The findings of this study show preliminary evidence that GMI ratings of corporate governance provide good guidance to investors on the quality of corporate governance in a country. Originality/value This paper is the first empirical attempt to examine the association between country-level corporate governance, GMI ratings for country-level corporate governance and EM.