Management Ownership control Chinese-controlled companies.

2425 managerial ownership increases there is a concurrent increase in the alignment of manager and shareholder interests Jensen and Meckling, 1976. Thus, the null hypothesis is as follows: H 5 : Income smoothing does not depend on management‘s ownership control

2.6 Chinese-controlled companies.

Next we shall look into the impact of having Chinese directors on the income smoothing practice. This is because, there exists a unique institutional characteristic of Malaysian Chinese companies, that is the wide-spread involvement of the owners as the management executives even after companies go public Heng, 1992. CheAhmad and Houghton 2001, and Johnson and Mitton 2003 document a significant relation between ethnicity and audit fees in the Malaysian market. They suggest that Chinese business practices may influence differences in levels of agency conflicts and risks associated with 2426 Chinese-controlled companies. This will lead to lower external audit fees charged to these companies. Accordingly for the purpose of this study, the null hypothesis is stated as follows: H6: Income smoothing act does not depend on the presence of majority Chinese directors of the board

3.7 Auditor

Ability of brand name auditors 426 to constrain earnings management is perceived to add credibility to the quality of reported earnings Chia and Lapsley, 2007. Since vario us parties use the financial statements of a company for making investment decisions, thus, auditors‘ independence is vital in order for them to discharge their statutory audit duties with greater objectivity and to issue the right opinion about the underl ying financial status of the company. Auditor independence is considered high, if firms are 426 Brand name auditors can either be Big-5 which is comprised of PricewaterhouseCoopers PwC, Andersen Worldwide AW, KPMG, Ernst Young and Deloitte Touc he Tohmatsu or Big-4 Big-5 excluding AW 2427 being audited by the international brand name audit firms Datar, Feltham and Huges, 1991. Accordingly, the null hypothesis is: H7: Income smoothing does not depend on the existence of the brand name audit firms.

2.8 Other factors

Whilst the main focus of this study is on the effects of corporate governance characteristics on income smoothing activities, the other determinants of income smoothing that were found to be important in previous studies need to be controlled in the model in order to have a meaningful analysis.

2.8.1 Industry

This point is taken into consideration, in order to observe which industry does income smoothing the most; the reason being, according to Ronen and Sadan 1981, Belkaoui and Picur 1984, and Albrecht and Richardson 1990, that companies in different industries smooth their income in varying degrees. It appears that companies in certain industries face a more restricted opportunity structure and a higher degree of