Do manufacturing firms in Bangladesh engage in earnings management to avoid losses? Further evidence using the governance elements as monitors

Purpose This study aims to investigate the earnings management practices of the listed manufacturing firms in Bangladesh and assess the impact of corporate governance mechanisms on such earnings management behavior. Design/methodology/approach The study applies the real earnings management (REM) model developed by Dechow et al. (1998) and implemented by Roychowdhury (2006) and modified Jones model (1991) for the proxy of accrual-based earnings management (AEM). It uses a pooled ordinary least square regression model corrected with robust standard errors for empirical analysis. Findings The study finds that firms with small positive earnings per share are engaged in AEM to avoid losses. Also, firm managers craft discretionary expenses to manage real earnings. For governance factors, the institutional shareholders tend to play a significant role in limiting both REM and AEM embedded in generally accepted accounting principles or International Financial Reporting Standards. Also, factors such as foreign ownership and board size significantly restrict REM, whereas director ownership encourages the same. The paper does not reveal any significant monitoring role for other governance factors in curbing either REM or AEM practices by Bangladeshi firms. Research limitations/implications The paper studies the monitoring role of governance mechanisms on listed manufacturing firms' earnings management. A study of separating the listed firms into family and non-family ones could be interesting for future research. Practical implications The paper unveils earning management techniques used by firms in Bangladesh and provides critical policy implications to the corporate governance mechanisms that effectively limit earnings management practice. Social implications The social significance is to aware constituents of financial reporting about the earnings management behavior by firms in emerging economies. Originality/value The study adds to evidence that the manufacturing firms in Bangladesh adopt both REM and AEM techniques to avoid losses. Simultaneously, the paper highlights some critical governance factors that can restrict misleading earnings management behavior by firms in an emerging economy to assist in policymaking.