Proportion of Independent Non-executive Directors Chairman Duality

2421 includes amongst others, the income smoothing act. The existence of non -executive directors NEDs in any organization will, in one way or another, hinder the management from any intention to smooth the reported earnings. This is because the NEDs, who are not involved in the day-to-day activities, will ensure that the management will act in a manner that is expected out of them, that is to increase the shareholders‘ value. δai and Tam β007 reported that NED are effective in monitoring managers from involving in income smoothing. Thus, it is hypothesized that the existence of NEDs will hinder the management from indulging in the income smoothing activities. Given the above discussion and evidence, we are led to the following null hypothesis: H 1 : Income smoothing does not depend on the existence of non-executive directors on the board.

2.2 Chairman Duality

2422 Fosberg and Nelson 1999 stated that firms that use separate leadership in order to control agency problems would experience a statistically significant improvement in performance as it permits clear-cut leadership for purposes of strategy formulation and implementation. This is supported by Farber 2005 who found fraud firms have higher percentage of duality as duality makes it difficult for insecure directors to be honest when evaluating firm performance which, in turn, would lead to long term organizational drift Carver, 1990. In contrast, the proponents of duality argue that non- duality would dilute the CEO‘s power to provide effective leadership of the company by increasing the probability that actions and expectations of management and the board are at odds with each other Alexander, Fennel and Halpern, 1993. Accordingly the null hypothesis is as follows: H2: Income smoothing does not depend on the existence of duality chairmanship. 2423

2.3 Remuneration

Remuneration is allocated with the intention of aligning the interest of the managers with that of the shareholders. However, since managers will suffer reput ation effects that could result in management‘s dismissal if their performance is poor, thus they have an incentive to smooth reported earnings by increasing current earnings at the expense of future earnings Fudenberg and Tirole, 1995. This is proved by Denis, Hanouna and Sarin 2006 who found that firms with both lawsuits and earnings restatements use executive option remuneration more than the matched firms. Cheng and Warfield 2005 also reported a relation between equity incentives and earnings miss tatement. Hence, the null hypothesis is as follows: H 3 : Income smoothing does not depend on the existence of remuneration scheme

2.4 Institutional Investors

It has been argued that that institutional investors are interested mainly in making quick profits i.e. short term gains Drucker, 1986. Since the institutional investors would withdraw their investment whenever they see a down turn in the earnings made, 2424 thus it is of no surprise that companies that have a large number of institutional investors would be more inclined to do income smoothing. However, Chung, Firth and Kim β005, found that institutional investors are effective in deterring managers‘ opportunistic earnings management. Accordingly the null hypothesis is as follows: H 4 : Income smoothing does not depend on the existence of institutional investors

2.5 Management Ownership control

Income smoothing activities is said to be significantly associated with management ownership εoses, 1λ87. As a manager‘s percentage of ownership increases, the ownership structure of a firm changes from one which is manager -controlled to one that is managerowner-controlled. Thus, as managerial ownership increases, there is a corresponding increase in the manager‘s discretionary ability to modify the revenue generating process through the use of accounting policy choice and this is hazardous to firm performance Morck et al., 1988 and Chen and Kao, 2005. In contrast, as