Exploring the Impact of Internal Corporate Governance on the Relation Between Disclosure Quality and Earnings Management in UK Listed Companies

Abstract

The article is dedicated to the impact of the internal corporate governance mechanism in the mediation of the relationship between quality of disclosure and the earnings management of the UK listed companies. Although in past literature, it has been determined that high quality level of disclosure minimizes managerial opportunism to the minimum, the degree to which the relationship operates in interdependence with other internal governance processes has not gained the due importance especially in the advanced, mature capital markets as in the United Kingdom. Using panel data from a sample of non-financial firms listed on the London Stock Exchange (LSE) between 2012 and 2021, the study examines how components of corporate governance—such as board independence, audit committee effectiveness, ownership concentration, and CEO duality—affect the strength and direction of the disclosure–earnings management link. The estimate of the discretionary accruals based on the Modified Jones Model is used as the indicator of the earnings management, and the quality of disclosure is proved with the help of the utilization of the self-designed disclosure index, which considers compliance with the IFRS, and also the narrative reporting standards.The empirical findings indicate that earnings management has negative relationship with the quality of disclosures which do not agree with the fact that the lack of transparency deters opportunism. Speaking more accurate, quality-of-disclosure and quality-of-earnings manipulation are more negatively correlated among the firms with an appropriate internal governance given the firms, whose board is independent and the members of the audit committee are at work. Quite on the reverse, the impoverished governance regimes weaken disclosure as a disciplining model. This conclusion is capable of making contributions to the theory upon safety which should regard the topic of corporate disclosures and openness and governance as it sheds light on interactive effects among the practice of disclosure and internal control arrangements settings. The recommendations to the regulators and the corporate boards and investors of the corporate environment in the UK interested in making the reporting of the corporate environment more honest and the possibility of manipulating the earnings limited will make the practical implications of the study.