An investigation into the effect of surplus free cash flow, corporate governance and firm size on earnings predictability
International Journal of Accounting & Information Management
ISSN: 1834-7649
Article publication date: 29 April 2014
Abstract
Purpose
Existing studies on corporate governance mainly focus on how a strong governance system enhances the valuation of firms with cash holding or free cash flow agency problem. The aims of this paper are threefold. First, it investigates the impact of surplus free cash flows (SFCF) on earnings predictability. Second, it investigates whether corporate governance variables moderate the negative impact of SFCF on earnings predictability. Finally, this study examines whether the ability of corporate governance to mitigate SFCF and improve the predictive value of earnings varies between large and small firms.
Design/methodology/approach
This paper uses heteroskedasticity-corrected least square regressions upon a sample of Malaysian listed firms.
Findings
This paper finds that firms with high SFCF experience less earnings predictability. It also indicates that earnings of firms with high SFCF are more predictable when institutional investors hold a large stake of shares and when a chairperson is independent. Finally, this paper reveals that the role of institutional and managerial ownership in mitigating agency conflict of free cash flow and improving earnings predictability is more prominent in larger firms. This study implies that investors still have reservations about the ability of boards to enhance earnings numbers in Malaysia, although efforts were taken to reform the corporate governance mechanisms following the Asian financial crisis.
Originality/value
This research is considered as the first attempt to examine the relationships between SFCF, corporate governance, firm size, and earnings predictability in a developing county such as Malaysia. The findings of this paper serve as a wake-up call to policy makers to evaluate the importance of governance structure in enhancing earnings predictability in emerging economies.
Keywords
Acknowledgements
JEL classification – G34, G38 The authors would like to acknowledge the financial support from Universiti Utara of Malaysia, and the valuable comments and suggestions from Dr Kawsar Ahmmed. The gratitude also goes to the anonymous reviewers of this paper. The authors take responsibility for any errors contained in this paper.
Citation
Ahmed AL-Dhamari, R. and Nor Izah Ku Ismail, K. (2014), "An investigation into the effect of surplus free cash flow, corporate governance and firm size on earnings predictability", International Journal of Accounting & Information Management, Vol. 22 No. 2, pp. 118-133. https://doi.org/10.1108/IJAIM-05-2013-0037
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited