The Effect of Corporate Governance Practices on Earnings Management: Moderating Role of Firm Size and Market Conditions

Abstract

Corporate governance has emerged as a pivotal mechanism to enhance the transparency and accountability of financial reporting worldwide. However, challenges remain in mitigating earnings management, particularly in varying market conditions and across firms of different sizes. This study aims to assess whether smaller firms and companies operating in volatile markets require distinct governance strategies to mitigate earnings manipulation effectively. The study employs a quantitative research approach with an explanatory research design to investigate the relationship between corporate governance practices and earnings management with firm size and market conditions as moderating variables. The results indicate that firms in stable environments better meet stakeholder expectations by minimizing earnings manipulation, thereby enhancing transparency and trust. Even well-governed large firms demonstrate vulnerability in turbulent market conditions, suggesting that market dynamics play a critical role in influencing managerial behavior. The findings provide practical implications for investors, emphasizing the importance of assessing a firm's governance quality, especially in volatile market environments.