Effects of the Information Disclosure and Evaluation System on Earnings Management

Information transparency enhances corporate governance. In an attempt to improve information transparency of the publicly traded and OTC companies and bring the power of the public into improve ments on corporate governance, the Taiwan Stock Exchange Corporation (TSEC) requested the Securities & Futures Institute (SFI) to implement an information disclosure and evaluation system for all publicly traded and OTC companies listed in TSEC. This study investigates effects of the system on earnings management behavior and the ability of the system to differentiate earnings management behavior among firms differed in their extents of information transparency. Empirical results indicate that earnings management decreased after the implementation of the system and the effects are higher for companies with higher management ownership holdings. However, the difference between "more transparent" and "less transparent" companies is not statistically significant. This is likely a result of inadequacy of a two-group classification system in distinguishing clearly differences in earnings management.