Abstract:

This study examines the degree of financial misreporting through real earnings management practices of Government Linked Companies (GLCs) listed on Bursa Malaysia. In addition, this study investigates the impact of total government shareholdings on real earnings management. Consistent with prior research, this study uses three proxies to measure real earnings management; abnormal cash flow from operations, abnormal production costs and abnormal discretionary expenses. Using a sample of 329 firm-year observations from 2001 to 2014, this study finds that government ownership has significantly negative association with all proxies of real earnings management. Overall, the results suggest that government ownership as an effective monitoring mechanism in limiting real earnings management practices. The findings support the incentive alignment hypothesis which argues that companies with government intervention are normally better governed.