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An investigation into the effect of surplus free cash flow, corporate governance and firm size on earnings predictability

Ahmed AL-Dhamari, Redhwan and Ku Ismail, Ku Nor Izah (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, 22 (2). pp. 118-133. ISSN 1834-7649

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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.

Item Type: Article
Uncontrolled Keywords: Ownership structure, Governance structure, Firm size, Earnings predictability, Surplus free cash flow
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Divisions: Tunku Puteri Intan Safinaz School of Accountancy (TISSA)
Depositing User: Prof. Dr. Ku Nor Izah Ku Ismail
Date Deposited: 10 Jun 2015 13:06
Last Modified: 17 Apr 2016 06:12

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