Corporate governance mechanisms in Greece and their effect on earnings management and firm performance

Abstract

Greece provides an interesting setting for corporate governance research since it is a country characterized by weak governance structures, low audit quality, moderate tax and financial conformity, low importance of capital markets and low financial transparency compared to other developed countries (Bushman et al., 2004; Dimitropoulos and Asteriou, 2010). Additionally, the 2008 global financial crisis triggered the Greek sovereign debt crisis in 2010, which highlighted pre-existing structural weaknesses and macroeconomic imbalances and led the economy into a deep recession (Repousis, 2015). In such a setting, this thesis investigates corporate governance mechanisms in Greece and their effect on earnings management and firm performance, examining non-financial firms listed on the Athens Stock Exchange (ASE) from 2006-2012. Efforts to increase investor confidence and improve the long-term success and competitiveness of Greek firms by improving corporate governance have come through the enacting and enforcement of laws and specific codes of good governance practice. The first empirical study examines the extent to which the implementation of corporate governance Law 3693/2008, which made audit committees mandatory for all Greek listed firms, constrains earnings management practices by these firms. Using panel data analysis, the negative relationship that is found to exist between corporate governance quality and earnings management before the implementation of the law changes to a positive one after the law’s implementation. This suggests that firms are more interested in adhering to the letter of the law rather than its spirit and that this particular corporate governance mechanism is not achieving its purpose. The second empirical study examines the relationship between corporate governance and firm performance in a financial crisis setting, where the expected relationship between the two variables is not a priori clear. Using panel data analysis, it is found that the positive relationship between corporate governance and firm performance prior to the Greek sovereign debt crisis period changes to a negative relationship during this period. This suggest that what is considered as ‘good’ governance in steady times can be counterproductive in times of crisis.