TIPOS DE CLIMA LABORAL

The results for the variable Big 4 which measures the audit firm size which could be referred to as audit quality as well show negative significant relationship with EM as Table 6.4 shows. This relationship implies that the presence of one of the Big 4 audit firms as an external auditor is associated with less EM. These results are consistent with the results of DeFond and Subramanyam (1998), Francis et al. (1999) and Becker et al. (2008) whose results suggested that significantly lower levels of EM are associated with the presence of a Big 4 auditor.

Similar results were found in Greece by prior studies. Leventis and Caramanis (2005) and Caramanis and Lennox (2008) tested the effect of audit effort on EM and they found that Big 4 audit firms exert more efforts in the audit process and provide better audit quality. Thus, they found that audits conducted by Big 4 audit firms are associated negatively with firms’ attempts to manage earnings upwards to meet or beat their earnings benchmark.

Although Leventis and Caramanis (2005) and Caramanis and Lennox (2008) used the auditor’s effort as the proxy for audit quality which is different from the proxy of the current study, but it can be argued that both proxies will yield the same results for two reasons. First, by definition audit quality is the probability that an existing material error is detected and reported by the auditor (DeAngelo, 1981). The auditing literature concludes that the audit quality of Big 4 auditors is superior to that of non-big 4 auditors (Lawrence et al., 2011). DeAngelo (1981) argues that accounting firm size is a proxy for audit quality, as no single client is

important to larger accounting firms and hence, larger accounting firms are less likely to compromise their independence. Second, the results of Caramanis and Lennox (2008) supported this by finding that big 4 audit firms exert more audit effort than their non-big 4 counterparts.

The results provide empirical evidence that Big 4 audit firms can have an impact on the level of EM in Greek listed firms. These results suggest that the hypothesis expecting a positive association between big 4 and EM should not be rejected: H2 There is a negative association between EM and Big 4.

The relationship between board size and EM appeared to be insignificant in all regression models. Hence, board size fails to explain any variation in the level of income smoothing as measured by EM in Greek listed firms. These results are consistent with the results of Dimitropoulos and Asteriou (2010) who examined the effect of board composition on the informativeness and quality of earnings in Greece and reported an insignificant relationship.

A plausible explanation that smaller boards are more efficient in constraining EM than large boards is that they have a higher level of membership coordination and communication efficiency and lower incidence of free-rider problems (Dimitripoulos and Asteriou, 2010). Moreover, independent directors are less likely to work effectively on large boards as it is more difficult for them to express their opinions which affect the efficiency of decision making and control (Jensen, 1993). Therefore, according to agency theory large boards impede the

efficiency and effectiveness of the monitoring role of the board which makes the theory in a position where smaller boards are more favoured.

The results of the current study do not provide any evidence to support agency theory concerning board size. Consequently, the hypothesis relevant to board size has to be rejected: H3 There is a positive association between board size and the variable EM.

Results of the regression models show that board independence had an insignificant relationship with EM in all models. The main phenomenon that should be discussed is the direction of association between board independence and EM. The results of the four regression models show a positive relationship between board independence and EM.

The findings of the current study fail to support agency theory and record a negative and insignificant relationship with EM. The mixed prior evidence makes it difficult to predict whether EM will decrease when board independence increases (Chen et al., 2011). Moreover, prior studies that examine cross-sectional correlation between EM and board independence could be subject to endogeneity issues as pointed out by Bowen (2008) and Bushman (2009) as having lower board independence and higher EM can be a part of a general equilibrium and is not a certain indication that board independence reduces EM.

The abovementioned endogeneity problem is mitigated to some extent because cross-sectional data was not used in this study. Higher EM in cross-sectional

studies might be due to endogenous variables affecting the dependent variable and not being controlled for in the study.

The significance of the variable board independence and the direction of the association provide empirical evidence that agency theory should not be supported with regards to board independence assumptions. Moreover, the relevant hypothesis should be rejected. H4: There is a positive association between board independence and the variable EM.

6.6 Summary and Conclusion

This chapter examines whether RPTs are associated with EM across a sample of 215 firm-year observations of companies listed on the Athens Stock Exchange (ASE). The existence of this link, between RPT and EM, is not obvious and depends on institutional factors and is affected by the proxy used to capture EM (Dechow et al. 2012). Using income smoothing as a proxy for EM, I do not find any significant association between EM and RPTs. Thus, my results do not provide evidence that RPTs are associated with EM as measured by income smoothing. The negative association between earnings management and RPTs is only significant for firms audited by Big-4 audit firms.

Further, I examine the relationship between EM and three corporate governance variables, namely, audit quality, size of the board of directors and board independence. Audit quality, as measured by the audit firm size showed a negative and significant association with EM. This implies that firms that hire Big

4 audit firms are less able to engage in income smoothing. On the other hand, board independence and board size did not record any significant relationship with EM.

Finally, several caveats should be highlighted. First, my study focuses on the link between RPTs and EM in the Greek context. The Greek context is special due to the relatively poor investor protection, enforcement mechanisms, and reporting quality. Hence, investigating the link between RPTs and EM in this context is important as it supports the notion that RPTs are not necessarily a mean for managing earnings. This implies that these results might not be generalisable to other countries. Second, as mentioned in prior studies (Ryngaert and Thomas, 2012; Gordon et al., 2005) studying RPTs is challenged by the availability of the data. Data on RPTs needs to be hand collected and requires extensive amounts of time and effort to be spent in analysing, idenitfying and collected data from annual reports. Finally, researchers studying RPTs must rely on transactions disclosed in the annual report issued by the firm. Therefore, it is still possible that there are RPTs that were not disclosed. Hence, the reporting entity can always decide which RPTs to disclose and which RPTs to hide.