Earnings quality and firm value: Does corporate governance matter?

Intara, Panern; Sangwichitr, Klangjai; Sattayarak, On-anong Article Earnings quality and firm value: Does corporate governance matter? Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Intara, Panern; Sangwichitr, Klangjai; Sattayarak, On-anong (2024) : Earnings quality and firm value: Does corporate governance matter?, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-17, https://doi.org/10.1080/23311975.2024.2386158 This Version is available at: https://hdl.handle.net/10419/326467 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 Earnings quality and firm value: Does corporate governance matter? Panern Intara, Klangjai Sangwichitr & On-anong Sattayarak To cite this article: Panern Intara, Klangjai Sangwichitr & On-anong Sattayarak (2024) Earnings quality and firm value: Does corporate governance matter?, Cogent Business & Management, 11:1, 2386158, DOI: 10.1080/23311975.2024.2386158 To link to this article: https://doi.org/10.1080/23311975.2024.2386158 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group View supplementary material Published online: 06 Aug 2024. Submit your article to this journal Article views: 2849 View related articles View Crossmark data Citing articles: 3 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 Accounting, corporAte governAnce & Business ethics | reseArch Article Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2386158 Earnings quality and firm value: Does corporate governance matter? panern intaraa , Klangjai sangwichitra and on-anong sattayarakb aDepartment of Business administration, Faculty of Management sciences, Prince of songkla university, Hatyai, thailand; bDepartment of accounting, Faculty of Management sciences, Prince of songkla university, Hatyai, thailand ABSTRACT this study examines the relationship between earnings quality and the firm value of listed companies in the stock exchange of thailand (set) in the property and construction sector. this research further investigates whether effective corporate governance (cg) mechanisms enhance the relationship between earning quality (measured by the accruals component and total accruals) and firm value (measured by tobin’s Q). the information is gathered from 84 listed companies comprising 672 firm-year observations covering the period from 2014 to 2021. the empirical findings indicate a statistically significant positive relationship between earnings quality and firm value. We discover that firms with strong cg tend to experience a stronger positive relationship between earnings quality and firm value than those with weak cg. the results are robust different proxies for firm value measurement. 1. Introduction Financial reporting is crucial for evaluating a company’s success, reflecting its position and performance for stakeholders (latif et al., 2017), such as executives and investors. these reports are essential tools for analyzing and making investment decisions and communicating financial activities effectively. the reliability of financial reports directly influences decision accuracy (shahwan, 2008; tontiset, 2015), with profit often being the key factor considered by financial reports’ users (sMe Bank of thailand, 2022). inadequate transparency and adjustments in financial reporting diminish stakeholder confidence in data accuracy, potentially leading to financial reports that must accurately represent the company’s performance and financial position, thus affecting stakeholders’ trust (schipper & vincent, 2003; sritarapipat, 2015). Quality profits are defined as profits with high cash flow components and low accruals (schipper & vincent, 2003) that arise from normal operations and recurring revenue that can be converted into cash sufficient to replace depreciating assets (tummanon, 2006). earning quality (eQ) is a crucial indicator drawing attention from various stakeholders. it accurately predicts future performance and financial insights, aiding effective economic decisions (hung etal., 2020; salehi et al., 2020). penman and Zhang (2002) define eQ as a firm’s capacity to predict future income. richardson et al. (2001) evaluate eQ through future income persistence, and Beneish and vargus (2002) concur that a firm’s revenue persistence indicates its earning quality. investors in the capital market heavily rely on financial statement data to assess a firm’s future cash flow and anticipate returns (Francis etal., 2004). therefore, in order to make effective decision, the financial reports’ users require high quality financial information. the significant crises in the financial world that occurred in the past include the 1997 Asian financial crisis and the 2008 subprime mortgage crisis. these are two worldwide financial crises related to earnings management and unavoidably influence eQ. the challenging issue associated with the crisis is © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT Klangjai sangwichitr [email protected] Department of Business administration, Faculty of Management sciences, Prince of songkla university, Hatyai, thailand. supplemental data for this article can be accessed online at https://doi.org/10.1080/23311975.2024.2386158. https://doi.org/10.1080/23311975.2024.2386158 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY received 19 December 2023 revised 23 July 2024 Accepted 25 July 2024 KEYWORDS earnings quality; firm value; corporate governance SUBJECTS Finance; Business, Management and Accounting; industry & industrial studies 2 p. intArA etAl. earning management. the pressure of such crises often motivates manipulation of accounting data before its public release (persakis, 2018; rosner, 2003), which may impact the quality of earnings reported by firms (An, 2017). recording impaired real estate debt as sales is an example of accounting distortion, resulting in increases in profits on a company’s financial statements. however, the actual condition of the real estate is not recovering, causing some firms to accumulate losses and eventually go bankrupt (lioudis, 2023). Additionally, another sector prone to accounting distortion is the construction and real estate development industry, which is often motivated to expedite income or sales recognition for the benefit of stakeholders (sincharoonsak, 2013). there are some previous studies exploring the relationship between eQ and firm performance or stock return; limited research exists on the relationship between earning quality and firm value (Asimakopoulos et al., 2020; choi, 2008; gaio & raposo, 2011; latif et al., 2017; theophillus & oyesola, 2018). in thailand, especially in the property and construction sector, as the context of this study, there is no literature exploring the relationship between eQ and firm value. the findings of previous studies also indicate inconclusive results. For example, some prior related studies found a positive relationship between eQ and firm value (Asimakopoulos etal., 2020; chia-Wu, 2012; choi, 2008; gaio & raposo, 2011; Jiujin et al., 2013; latif et al., 2017; theophillus & oyesola, 2018), whereas hutagaol-Martowidjojo et al. (2019) found the negative relationship between eQ and firm value of companies listed on the Jakarta stock exchange. the relationship between eQ and firm value of firms listed in this sector remains questionable. this uncertainty is an opportunity for further investigation. corporate governance or cg practice is the management idea that affects a company in many aspects, including protecting investors’ interests (la porta et al., 2000; utama et al., 2017), ensuring the integrity of the company, mitigating the potential for corruption (Alqooti, 2020), improving the investment efficiency (Agyei-Mensah, 2021; ullah et al., 2020), and providing advantages to firm’s fund-raising (the stock exchange of thailand, 2017). More importantly, the cg practice plays a role in reducing the opportunities for earnings management practices (Al-haddad & Whittington, 2019), which may increase the quality of earnings, improve and develop transparency (torchia & calabrò, 2016; tulcanaza-prieto & lee, 2022), enhance the quality of financial reporting (Alzeban, 2020; Mouselli et al., 2014). this research is driven by several motivation, first, the property and construction sector is one of thailand’s most important leading sectors, significantly contributing to the national economy (Klinchuanchun, 2023; World Bank Blogs, 2009). this sector provided 10% of thailand’s gDp in 2022 (Krungsri research, 2023), as well as the property and construction sector impact the development of other industries, such as finance, electrical appliances, and furniture. second, the increasing importance of thailand’s property and construction sector coupled with challenges in the quality of financial reports, especially profit. if the earnings provided in the thai real estate firm’s financial reports are of high quality, such information could encourage more investors to invest in the industry. Furthermore, to be consistent with the principle of long-term investment for sustainability (suttipun, 2023), if this study can prove that eQ is significant in enhancing firm value, then eQ may be an essential component in assisting with investment decisions. last, in the context of this sector, there have yet to be any comprehensive studies on the relationship between eQ and firm value. this study is novel and could serve as evidence for firms in the property and construction sector to become more aware of the importance of eQ. Based on the compelling reasons above, this study aims to (1) investigate the relationship between eQ and the firm value of listed firms in the property and construction sector of the stock exchange of thailand and (2) examine whether firms with different levels of cg practices have different relationships between eQ and firm value. there are two research questions: What is the relationship between eQ and the firm value of listed firms in the property and construction sector of the stock exchange of thailand? and could stronger cg practices enhance the relationship between eQ and firm value? Balanced panel data of 84 property and construction companies listed on the thailand stock exchange between 2014 and 2021 were used in this study. the study found that eQ is positively and significantly related to firm value. Firms with strong cg tend to have a stronger positive relationship between eQ and firm value than those with weak cg. effective cg mechanisms enhance the positive relationship between eQ and firm value. in further tests, we demonstrate that our primary findings remain robust to alternative measures of a company valuation. strong cg effectively monitors the managerial opportunistic behavior of earnings management, increasing eQ. our findings contribute to the finance literature in cogent Business & MAnAgeMent 3 different dimensions. Firstly, the study demonstrates how eQ relates to firm value. secondly, this study also reinforces the importance of cg in enhancing the positive relationship between eQ and firm value. regarding practical contributions, the study’s findings are essential for executives and investors. the firm value may be attained by enhancing the quality of financial reports and implementing cg principles throughout the firm. the paper is organized as follows: section 2 shows the literature reviews and hypotheses development. section 3 explains the research design. section 4 presents the empirical results and discussion. Finally, section 5 provides a summary and conclusion, policy implications, limitations, and suggestions for future studies. 2. Literature review and hypothesis development this study used agency and signaling theories to explain the relationship between eQ and firm value and clarify the effect of different cg practices on the relationships between eQ and firm value. there are three sections in this study including a theoretical literature review, earning quality and firm value, and the role of cg practice on the relationship between eQ and firm value. 2.1. Theoretical literature review there are two foundation theories in this study, which are agency theory and signaling theory. Jensen and Meckling (1976) explained that agency theory is a relationship between the principal and agent. As the firm’s owner, the principal agrees to transfer resources and management rights to another person known as an agency, which administers them so that the principal achieves the maximum returns while the agent receives compensation. As long as the management (agent) decides to invest to create the highest return, aiming to create shareholder’s wealth, the relationship of shareholders as principal and agent remains effective. on the contrary, if the interests and objectives of shareholders and management do not align, agency problems may occur and lead to agency costs and may have a negative impact on the business since the agents may decide in the way that prioritizes their interest instead of the shareholders wealth (Jensen & Meckling, 1976; Wahyudin & solikhah, 2017; Worokinasih & Zaini, 2020). Moreover, spence (1973) introduced that firm information sharing is important. it suggests that firms should give all stakeholders essential information, such as their financial performance, prospects, and governance practices (chatterjee & rakshit, 2020; Devie et al., 2020; Dey, 2008; Kyere & Ausloos, 2020). 2.2. Earning quality and firm value profit is financial information that investors often use to make investment decisions. if profits are related to stock prices or returns, then quality profits can be helpful in effective forecasting and investment analysis. Quality profits are profits generated during a period corresponding to cash flow creation. eQ is an effective current performance reflected in financial reports and will be a reliable predictor of future performance and the firm’s intrinsic value. Meanwhile, the more complicated the process of estimating cash flows, the more likely the profit will be of poor quality (stickney, 1996). in addition, high-quality profits should result from regular operations and be convertible into cash sufficient to meet needs. this is consistent with sukserm (2007), who stated that quality profits result from recurring activities and are convertible into cash sufficient to replace depreciable assets. earning quality (eQ) is the relationship between accruals and cash flows, which are profit components. According to this viewpoint, quality profits are defined as profits with high cash flow components and minimized accruals (schipper & vincent, 2003). Meanwhile, eQ mainly refers to the absence of earnings management (healy & Wahlen, 1999; Kamarudin & ismail, 2014). Managers may manipulate financial statements by inflating current earnings, exaggerating sales and revenue, or intentionally deflating current period costs and expenses, all of which present a better indication of the firm’s ability. therefore, the level of earnings management will affect eQ. high-quality earnings represent current operating performance, are a reliable predictor of future operating performance, and appropriately reflect the intrinsic value of the firm (Dechow & schrand, 2004), 4 p. intArA etAl. while weak eQ is a sign of information asymmetry between external and internal stakeholders (pimentel & Jorge, 2019; salehi etal., 2020, 2022). gaio and raposo (2011) conducted a study measuring eQ based on seven income attributes. the result found that higher eQ leads to a statistically significant increase in firm value. this is consistent with a study of 214 non-financial listed firms in pakistan, which found that eQ positively contributes to maximizing firm value (latif et al., 2017) and alight to a study by Asimakopoulos etal. (2020), listed companies on the Athens stock exchange with higher quality of earnings have a greater firm value. choi (2008) investigated the influence of eQ on the firm value of manufacturing firms listed on the Korea stock exchange between 2003 and 2005. the study discovered the positive influence of eQ on firm value. the higher the eQ, the higher the firm value. Financial information reliability is crucial when determining Korean public companies’ market value. the results of this study also reinforce the importance of eQ in reducing information risk and cost of equity. theophillus and oyesola (2018) examined the impact of eQ on tobin’s Q of 51 firms listed on the nigerian stock exchange between 2000 and 2016. the findings revealed that earnings persistence, a measure of eQ, positively affected firm value. Jiujin etal. (2013) studied eQ’s impact on sMes’ firm value on the shenzhen stock exchange between 2009 and 2012. the earnings management behavior of executives contributes to a decrease in eQ. the study’s findings show that manipulating earnings significantly negatively impacts the company’s value. companies listed in the taiwan stock exchange (tWse) were used to study the impact of eQ on risk-taking level and firm value. the data were divided into two periods: before the financial crisis (2001–2007) and after the financial crisis (2008–2010). the study found that eQ results in a decrease in risk-taking levels and an increase in firm value. companies with low eQ or high accruals have lower firm value, especially after the 2008 financial crisis (chia-Wu, 2012). high eQ and greater liquidity in Jordanian public shareholding companies in the industrial sector can increase the market value of their shares (Alsufy et al., 2020). the positive relationship between earning quality and firm value in many european countries has been found (Fassas et al., 2023). studies on the impact of eQ on firm value and firm performance in the thai context are quite limited, and the findings vary from previous studies. chumsai na Ayudhya (2007) studied the impact of eQ on the firm value of listed companies listed on the stock exchange of thailand between 2003 and 2005. total accrual was used to measure eQ, while the market value of equity measured firm value. the study found that the market value of equity decreases with high accounting accruals, which can be caused by low cash flow components and result in low eQ. phromin (2017) examined the relationship between firm performance, eQ, and market stock price of listed firms in the sDet in the technology industry group between 2014 and 2016. Working capital accruals (WcA) and total net operational accruals (noA) were used to determine eQ. the analysis discovered that WcA and noA have an adverse relationship with the stock price. A decrease in the accrual component indicates that net profit can better reflect cash flow, reflecting the quality of earnings and increasing the stock market price. suaplai (2011) studied the relationship between eQ and the firm value of 42 listed companies in the Market for Alternative investment (MAi) between 2007 and 2010 with 168 firm-year observations. the accruals component measured eQ, while tobin’s Q measured firm value. however, the study found that eQ had no effect on firm value, while firm size and capital structure, which are control variables, positively impacted firm value. Furthermore, eQ could affect other factors and create changes in business value, such as the quality of financial information; accounting profit directly impacts on lowering the cost of capital (easley & o’hara, 2004; leuz & verrecchia, 2005). eQ decreases the costs of agency conflicts as well as delivers a better future cash flow for shareholders. this means that eQ can reduce the cost of equity (Watts, 2003). With a high level of information asymmetry between shareholders and managers, shareholders may require a high rate of return to compensate for the risk. therefore, eQ is one of the most essential information levels. higher eQ may lead shareholders to expect a lower required rate of return, resulting in a lower cost of capital and an increase in firm value. the results of the above empirical studies revealed inconsistencies and the relationship between eQ and firm value remains unresolved. consequently, there exists a need for more literature and a researchable gap between eQ and firm value, which is the substance of this study. considering the findings above regarding the relationship between eQ and firm value, including the above conclusions, the following hypothesis was proposed: cogent Business & MAnAgeMent 5 Hypothesis 1. There is a significant and positive relationship between earning quality (EQ) and firm value of listed companies in SET in the property and construction sector. 2.3. Role of corporate governance (CG) practice on the relationship between EQ and firm value the stock exchange of thailand (2017) defines corporate governance (cg) as a system focusing on the relationships of all stakeholders, including the management team, the board of directors, shareholders, and others. in the meantime, the organization for economic cooperation and Development (oecD) (2015) defines cg as a control system that separates the roles and rights of all stakeholders as well as defines the procedures for making decisions based on the firm’s objectives. Moreover, srijunpetch (2012) described cg as a quality management system that promotes efficiency, creates competitiveness, and adds firm value through transparent disclosures. the information asymmetry between stakeholders influences the difficulties of controlling and monitoring the agent’s actions (Jensen & Meckling, 1976). therefore, companies may prevent agency conflicts by implementing cg, which increases firm value (subanidja etal., 2016). tulcanaza-prieto and lee (2022) investigate whether effective cg intervenes in the negative relationship between earnings management and firm value. While nasir et al. (2024) reveal that cg practices improve a firm’s value and corporate performance. even though there are few studies that have examined the role of cg in the relationship between eQ and firm value. on the other hand, there is a link between cg practices and eQ (Bekiris & Doukakis, 2011; Mahrani & soewarno, 2018; Mollah & Zaman, 2015; suhadak et al., 2019; tjahjadi et al., 2021). he etal. (2009) mentioned that firms with strong cg practices introduce the accounting-monitoring process, improve shareholder confidence, reduce opportunistic earnings management, and enhance eQ. harymawan and nowland (2016) showed that stronger government effectiveness results in higher eQ. el-helaly et al. (2018) examined the relationship between cg and earnings management and found that effective cg practice was negatively associated with earnings management. the statistically significant negative relationship between earnings management and firm value disappears for firms with strong cg, implying that cg plays a moderating role in the negative relationship between earnings management and firm value. Moreover, managers’ opportunistic behaviors decrease when firms adopt cg policies emphasizing transparency and disclosure. in this context, strong cg may enhance the relationship between eQ and firm value because cg characteristics introduce efficient internal control, disclosure, and transparency, reducing the opportunities for earnings management in the firm’s processes; firms can reduce information asymmetry, which affects eQ and the firm value. Firms with better cg practice have a stronger relationship between eQ and firm value than firms with poor cg practice. therefore, our second hypothesis is presented as follows: Hypothesis 2. Effective CG mechanisms enhance the positive relationship between earning quality (EQ) and firm value of listed companies in SET in the property and construction sector. 3. Research design this study examines listed companies in the property and construction sector of the stock exchange of thailand (set) from 2014 to 2021 to test whether earning quality influences firm value. the secondary data, which consists of annual reports and financial information, can be retrieved from the setsMArt database prepared by the stock exchange of thailand. there are three sub-sections: (1) population and sample, (2) data collection and variable measurement, and (3) research model. 3.1. Population and sample the population and sample of this study is all the listed companies in the property and construction sector of the stock exchange of thailand (set). As mentioned in the introduction section, we select samples based on the reasons as follows: (1) the real estate sector is a prominent industry in thailand, substantially contributing to the country’s economy. Furthermore, this sector’s advancement significantly influences the expansion of other businesses; including finance, electrical appliances, and furnishings; 6 p. intArA etAl. and (2) no comprehensive investigations have examined the relationship between earning quality and firm value of the companies in this sector. this study is novel and provides credible data for firms in this sector to enhance their awareness of earning quality. the initial sample consists of 161 firms. our sample is then reduced because of the incompleteness of data. real estate mutual funds, real estate investment trusts, and listed companies with less than eight years of financial information are excluded from the sample. therefore, the final sample consists of 84 firms with 672 firm-year observations, as detailed in the table 1. 3.2. Data collection and variable measurement Data is collected using secondary data from annual reports between 2014 and 2021 reporting periods from the set security Market Analysis and reporting tool (setsMArt) database. there are four main variable groups in this study, which include (1) firm value represented by tobin’s Q, (2) the main independent variable; earning quality, measured by two different proxies; accruals component (sloan, 1996) and total accruals (richardson, 2003), (3) moderating variable, the corporate governance score (cg). the converting approach of the cg level information was used to measure cg scores for this study, and (4) control variables. Five firm-specific characteristics are used as the control variables: firm size, firm growth, net profit margin, return on assets, and leverage. All control variables’ proxies are chosen by the previous related studies (Asimakopoulos et al., 2020; chumsai na Ayudhya, 2007; gaio & raposo, 2011; salehi et al., 2022; tulcanaza-prieto & lee, 2022). All the variable measurements and notations used are shown in table 2. Table 1. sample. number of firm-year in the property and construction sector between 2014 and 2021 (161 firms for 8 years) 1,288 Less Real estate mutual funds and real estate investment trusts (458) Listed companies with less than eight years of financial information (158) total number of firm-year observation 672 Note: setsMaRt Database (2022) and Researchers’ own calculation. Table 2. Description of variables. Variables Measurement Predicted sign Previous research independent variable tobin’s Q (tQ) Market Capitalization+Preferred Stock+Net Debt Book Valueof Totall A s s e t s Chung and Pruitt (1994) Dependent Variables accruals component (eQ1) ( CA CASH) ( CL STD TP) DEP Average Total Assets ∆ ∆ ∆∆ ∆ − − − −− +sloan (1996) total accruals (eQ2) Earnings CFO CFI Average Total Assets i,t i,t i,t i,t −− +Richardson (2003) Corporate governance (Cg) the converting approach of the Cg level information of thai ioD +issarangkul na ayuthya (2015) Khamkrut (2019) Potisit (2018) Wuthisingchai (2019) Control Variables Firm size (siZe) Ln(total assets) +asimakopoulos et al. (2020) tulcanaza-Prieto and Lee (2022) Firm growth (gRoWtH) (Sales Sales ) Sales i,t i,t 1 i,t 1 −− − +gaio and Raposo (2011) net Profit Margin (nPM) Net Income Total Revenue +Chumsai na ayudhya (2007) Return on assets (Roa) Net Income Total Assets +asimakopoulos et al. (2020) salehi et al., 2022 Leverage (LeV) TotalLiabilities Total Assets –asimakopoulos et al. (2020) tulcanaza-Prieto and Lee (2022) cogent Business & MAnAgeMent 7 3.2.1. Dependent variables 3.2.1.1. Firm value (FV). the total present value of all income or benefits expected to be made during the life of a business operation is referred to as the firm value. in other words, firm value consists of actual and potential benefits that a firm can provide, expressed in the form of value we can estimate using the appropriate method. there are various approaches and techniques for determining the firm’s value. in general, these approaches concentrate mainly on three perspectives: (1) viewpoints based on corporate assets, (2) viewpoints based on financial performance, and (3) market-based viewpoints. this study intends to employ perspectives based on financial performance, which is a viewpoint that aims to measure firm value based on business reports, such as financial performance and capital structure or capital mobilization. According to chung and pruitt (1994), tobin’s Q index is calculated as follows: Tobin sQ= Market Capitalization+Preferred Stock Value+Net Debt B ′ oook Value of Total Assets (1) where market capitalization is the current market value of individual stock, which can be calculated by multiplying the current market share price and number of shares outstanding, net debt is the difference between the book value of current liabilities and the book value of current assets and includes the book value of long-term debt. tobin’s Q values more than one show that the company is more expensive than the replacement cost of its assets, while values between zero and one mean the company is undervalued, as the cost to replace its assets exceeds its market value. 3.2.2. Independent variables 3.2.2.1. Earning quality (EQ).this study used two different proxies of eQ, referring to sloan (1996) and richardson (2003). According to sloan (1996), the total accruals can be calculated by taking the changes in non-cash working capital and deducting the depreciation expense, which should be scaled by average total assets. non-cash working capital refers to the difference between non-cash current assets and current liabilities, less short-term debt and taxes payable. total accruals (Acc) can be defined as follows: Accruals component ( CA CASH) ( CL STD TP) DEP Average Tot = − −− −− ∆ ∆ ∆∆ ∆ aal Assets (2) where ΔcA is the current asset’s change, and ΔcAsh is the change in cash items. Δcl and ΔstD are the changes in current liabilities and the current portion of long-term debt, Δtp is the change in tax payables, and Dep is depreciation and amortization. the accruals component is the number of accruals that can reliably and adequately convert profits into cash. the accruals component compares to the net profit in the financial statements. if the accruals component is low, the net profit can be represented as cash flow, indicating that the profit is high quality. however, if the accruals component is high, the reported net profit fails to represent cash flow profit accurately, implying that the company’s profits are of low quality. For the simplicity of interpretation, the calculated accruals component values are multiplied by a number of negative one so that high values indicate good eQ, while low values indicate low eQ. According to richardson (2003), eQ is measured through earnings management to measure the quality of profits through extraordinary accrual/earnings. We employ richardson (2003) to measure the quality of earnings, which can be expressed as follows. Total Accruals Earnings CFO CFI Average Total As i,t i,t i,t i,t = −− () ss e t s i,t (3) where total accrualsi,t is the ratio of total accruals divided by the average net assets of firm i at year t, earningsi,t is net income before the extraordinary item of firm i at year t. cFoi,t, and cFii,t are the operating cash flow and investing cash flow of firm i at year t, respectively. total accruals are the total accruals scaled by average total assets. total accruals and profit quality or earning quality are inversely correlated. high total accruals mean low profit or earning quality. in 14 p. intArA etAl. References Agyei-Mensah, B. K. (2021). the impact of board characteristics on corporate investment decisions: an empirical study. Corporate Governance, 21(4), 569–586. https://doi.org/10.1108/cg-04-2020-0125 Alqooti, A. A. (2020). public governance in the public sector: literature review. International Journal of Business Ethics and Governance, 3(3), 14–25. https://doi.org/10.51325/ijbeg.v3i3.47 Al-haddad, l., & Whittington, M. (2019). the impact of corporate governance mechanisms on real and accrual earnings management practices: evidence from Jordan. Corporate Governance, 19(6), 1167–1186. https://doi.org/10.1108/ cg-05-2018-0183 Alsufy, F., Afifa, M. A., & soda, M. Z. (2020). Mediating effects of liquidity in the relationship between earnings quality and market value of the share price: evidence from Jordan. Review of Applied SocioEconomic Research, 19(1), 17–32. Alzeban, A. (2020). the impact of audit committee, ceo, and external auditor quality on the quality of financial reporting. Corporate Governance, 20(2), 263–279. https://doi.org/10.1108/cg-07-2019-0204 An, Y. (2017). Measuring earnings quality over time. International Journal of Economics and Financial Issues, 7(3), 82– 87. Asimakopoulos, i., Fassas, A., & Malliaropulos, D. (2020). Does earnings quality matter? evidence from the Athens exchange. Economic Bulletin, 2020(52), 93–112. https://doi.org/10.52903/econbull20205204 Bajaj, Y., Kashiramka, s., & singh, s. (2018). Dynamics of capital structure: evidence from indian manufacturing firms. J. for Global Business Advancement, 11(6), 667–686. https://doi.org/10.1504/JgBA.2018.097774 Bekiris, F. v., & Doukakis, l. c. (2011). corporate governance and accruals earnings management. Managerial and Decision Economics, 32(7), 439–456. https://doi.org/10.1002/mde.1541 Beneish, M. D., & vargus, M. e. (2002). insider trading, earnings quality and accrual mispricing. The Accounting Review, 77(4), 755–791. https://doi.org/10.2308/accr.2002.77.4.755 chatterjee, r., & rakshit, D. (2020). Association between earnings management and corporate governance mechanisms: A study based on select firms in india. Global Business Review, 24(1), 152–170. https://doi. org/10.1177/0972150919885545 chia-Wu, l. (2012). earnings quality, risk-taking and firm value: evidence from taiwan. International Proceedings of Economics Development and Research, 50(24), 119–123. choi, J. K. (2008). An empirical study on the relationship between earnings quality and firm value. Korean Journal of Financial Studies, 37(5), 813–839. chumsai na Ayudhya, K. (2007). Earnings quality, impact on firm value. thammasat university. chung, K. h., & pruitt, s. W. (1994). A simple approximation of tobin’s Q. Financial Management, 23(3), 70–74. https:// doi.org/10.2307/3665623 Damodaran, A. (1999). Financing innovations and capital structure choices. Journal of Applied Corporate Finance, 12(1), 28–39. https://doi.org/10.1111/j.1745-6622.1999.tb00657.x Davidson, r., & MacKinnon, J. g. (2004). Econometric theory and methods (vol. 5). oxford university press. Dechow, p., & schrand, c. (2004). Earnings quality. the research Foundation of cFA institute. https://doi.org/10.2469/ cp.v2004.n3.3394 Devie, D., liman, l. p., tarigan, J., & Jie, F. (2020). corporate social responsibility, financial performance and risk in indonesian natural resources industry. Social Responsibility Journal, 16(1), 73–90. https://doi.org/10.1108/ srJ-06-2018-0155 Dey, A. (2008). corporate governance and agency conflicts. Journal of Accounting Research, 46(5), 1143–1181. https:// doi.org/10.1111/j.1475-679X.2008.00301.x easley, D., & o’hara, M. (2004). information and the cost of capital. The Journal of Finance, 59(4), 1553–1583. https:// doi.org/10.1111/j.1540-6261.2004.00672.x el-helaly, M., shehata, n. F., & el-sherif, r. (2018). national corporate governance, gMi ratings and earnings management: A country level study. Asian Review of Accounting, 26(3), 373–390. https://doi.org/10.1108/ ArA-07-2017-0124 elghuweel, M. i., ntim, g. c., opong, K. K., & Avison, l. (2017). corporate governance, islamic governance and earnings management in oman: A new empirical insight from a behavioural theoretical framework. Journal of Accounting in Emerging Economies, 7(2), 190–224. https://doi.org/10.1108/JAee-09-2015-0064 Fassas, A., nerantzidis, M., tsakalos, i., & Asimakopoulos, i. (2023). earnings quality and firm valuation: evidence from several european countries. Corporate Governance, 23(6), 1298–1313. https://doi.org/10.1108/cg-09-2022-0391 Francis, J., laFond, r., olsson, p. M., & schipper, K. (2004). costs of equity and earnings attributes. The Accounting Review, 79(4), 967–1010. https://doi.org/10.2308/accr.2004.79.4.967 gaio, c., & raposo, c. (2011). earnings quality and firm valuation: international evidence. Accounting & Finance, 51(2), 467–499. https://doi.org/10.1111/j.1467-629X.2010.00362.x gujarati, D. n., & porter, D. c. (2009). Basic econometrics (5th ed.). Mcgraw-hill. harymawan, i., & nowland, J. (2016). political connections and earnings quality: how do connected firms respond to changes in political stability and government effectiveness? International Journal of Accounting & Information Management, 24(4), 339–356. https://doi.org/10.1108/iJAiM-05-2016-0056 cogent Business & MAnAgeMent 15 he, l., réal labelle, c. p., & Daniel, t. (2009). Board monitoring, audit committee effectiveness, and financial reporting quality: review and synthesis of empirical evidence. Journal of Forensic & Investigative Accounting, 1(2), 1–14. healy, p. M., & Wahlen, M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365–383. https://doi.org/10.2308/acch.1999.13.4.365 hung, D. n., tran, M. D., & cuc, n. t. (2020). the impact of earnings quality on firm value: the case of vietnam. The Journal of Asian Finance, Economics and Business, 7(3), 63–72. https://doi.org/10.13106/jafeb.2020.vol7.no3.63 hutagaol-Martowidjojo, Y., valentincic, A., & Warganegara, D. l. (2019). earnings quality and market values of indonesian listed firms. Australian Accounting Review, 29(1), 95–111. https://doi.org/10.1111/auar.12234 issarangkul na Ayuthya, W. (2015). The Relationship between corporate governance rating score and firm performance of listed companies of the stock exchange of Thailand. thammasat university. Jensen, M. c., & Meckling, W. h. (1976). theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X Jiujin, l., Wang, F., & Xu, c. (2013). earning quality, venture capital and firm value. Computer Modeling & New Technologies, 17(5c), 242–247. Kamarudin, K. A., & ismail, W. A. W. (2014). earnings quality construct and measures in empirical accounting studies. International Conference on Governance and Strategic Management. Procedia Economics and Finance, 2(1), 542– 578. Khamkrut, p. (2019). Corporate governance rating score and performance of companies listed on The Market for Alternative Investment (MAI). Bangkok: College of Innovative Business and Accountancy. Dhurakij pundit university. Klinchuanchun, p. (2023). Krungsri research. Housing in Upcountry (6 Major Provinces). https://www.krungsri.com/en/ research/industry/industry-outlook/real-estate/housing-in-upcountry/io/io-housing-in-upcountry2023-2025 Krungsri research. (2023). Industry Outlook 2023–2025: Housing in Upcountry. https://www.krungsri.com/en/research/ industry/industry-outlook/real-estate/housing-in-upcountry/io/io-housing-in-upcountry-2023–2025 Kyere, M., & Ausloos, M. (2020). corporate governance and firms financial performance in the united Kingdom. International Journal of Finance & Economics, 26(2), 1871–1885. https://doi.org/10.1002/ijfe.1883 la porta, r., lopez-de-silanes, F., shleifer, A., & vishny, r. (2000). investor protection and corporate governance. Journal of Financial Economics, 58(1-2), 3–27. https://doi.org/10.1016/s0304-405X(00)00065-9 latif, K., Bhatti, A. A., & raheman, A. (2017). earnings quality: A missing link between corporate governance and firm value. Business & Economic Review, 9(2), 255–279. https://doi.org/10.22547/Ber/9.2.11 leuz, c., & verrecchia, r. e. (2005). Firms’ capital allocation choices, information quality, and the cost of capital. SSRN Electronic Journal. lioudis, n. (2023, March 10). The Collapse of Lehman Brothers: A case study. https://www.investopedia.com/articles/ economics/09/lehman-brothers-collapse.asp Mahrani, M., & soewarno, n. (2018). the effect of good corporate governance mechanism and corporate social responsibility on financial performance with earnings management as mediating variable. Asian Journal of Accounting Research, 3(1), 41–60. https://doi.org/10.1108/AJAr-06-2018-0008 Mollah, s., & Zaman, M. (2015). shariah supervision, corporate governance and performance: conventional vs. islamic banks. Journal of Banking & Finance, 58, 418–435. https://doi.org/10.1016/j.jbankfin.2015.04.030 Mouselli, s., Abdulraouf, r., & Jaafar, A. (2014). corporate governance, accruals quality and stock returns: evidence from the uK. Corporate Governance, 14(1), 32–44. https://doi.org/10.1108/cg-12-2012-0093 nasir, A., Wan ismail, W. A., Kamarudin, K. A., Zarefar, A., Armadani. (2024). examining the impact of corporate governance and family ownership on corporate performance: evidence from the indonesian stock exchange. Cogent Business & Management, 11(1), 546. https://doi.org/10.1080/23311975.2024.2339546 ntim, c. g., & soobaroyen, t. (2013). corporate governance and performance in socially responsible corporations: new empirical insights from a neo-institutional framework. Corporate Governance, 21(5), 468–494. https://doi. org/10.1111/corg.12026 oecD. (2015). G20/OECD Principles of Corporate Governance. oecD. https://doi.org/10.1787/9789264236882-en penman, s. h., & Zhang, X.-J. (2002). Accounting conservatism, the quality of earnings, and stock returns. The Accounting Review, 77(2), 237–264. https://doi.org/10.2139/ssrn.201048 persakis, A. (2018). Earning quality under financial crisis of 2008: A global empirical investigation. university of thessaly. phromin, D. (2017). Relationship among performance and earnings quality on market stock price of listed companies in the stock exchange of Thailand in the Technology Industry Group. rajamangala university of technology thanyaburi. pimentel, l. M., & Jorge, s. (2019). Earnings quality and firm valuation: A new perspective deriving from literature. university of coimbra. potisit, v. (2018). The relationship between corporate governance and audit fees: Proper Case of the firm listed in the stock exchange of Thailand for 2017. the university of the thai chamber of commerce. richardson, s. A. (2003). Earnings Quality and Short Sellers. Accounting horizons. https://doi.org/10.2308/ acch.2003.17.s-1.49 richardson, s. A., sloan, r. g., soliman, M., & tuna, i. (2001). information in accruals about the quality of earnings. SSRN Electronic Journal. rosner, r. l. (2003). earnings Manipulation in Failing Firms. Contemporary Accounting Research, 20(2), 361–408. https:// doi.org/10.1506/8evn-9KrB-3Ae4-ee81 16 p. intArA etAl. salehi, i., Afifa, M. A., & Alsufy, F. (2020). Does earnings quality affect companies’ performance? new evidence from the Jordanian Market. The Journal of Asian Finance, Economics and Business, 7(11), 33–43. https://doi.org/10.13106/ jafeb.2020.vol7.no11.033 salehi, M., Zimon, g., Arianpoor, A., & gholezoo, F. e. (2022). the impact of investment efficiency on firm value and moderating role of institutional ownership and board independence. Journal of Risk and Financial Management, 15(4), 170. https://doi.org/10.3390/jrfm15040170 schipper, K., & vincent, l. (2003). earnings quality. Accounting Horizons, 17(s-1), 97–110. https://doi.org/10.2308/ acch.2003.17.s-1.97 setsMArt Database. (2022). Bangkok, Bangkok, thailand. shahwan, Y. (2008). Qualitative characteristics of financial reporting: A historical perspective. Journal of Applied Accounting Research, 9(3), 192–202. https://doi.org/10.1108/09675420810919748 sincharoonsak, t. (2013). Fraud by financial statement manipulation. Association of private higher education institutions of thailand. 1454–1467. sloan, r. g. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289–315. small and Medium enterprise Development Bank of thailand. (2022). The importance of financial statements reflecting business and investment capabilities. spence, M. (1973). Job market signaling. The Quarterly Journal of Economics, 87(3), 355–374. https://doi. org/10.2307/1882010 srijunpetch, s. (2012). principles of corporate governance. Journal of Business Administration, Thammasat Business School, 35(33), 1–6. sritarapipat, o. (2015). revenue and quality of earnings by listed companies in the property and construction industry group. university of the thai chamber of commerce. Journal Humanities and Social Sciences, 35(1), 162–181. stickney, c. (1996). Financial reporting and statement analysis: A strategic perspective. Dryden press. suaplai, W. (2011). The relationship between earnings quality and firm value. thammasat university. subanidja, s., rajasa, A., suharto, e., & Atmanto, J. D. (2016). the determinants of firm value: the role of earnings management and good corporate governance. Corporate Ownership and Control, 13(4), 609–615. https://doi. org/10.22495/cocv13i4c4p10 suhadak, s., Mangesti rahayu, s., & handayani, s. r. (2019). cg, financial architecture on stock return, financial performance and corporate value. International Journal of Productivity and Performance Management, 69(9), 1813–1831. https://doi.org/10.1108/iJppM-09-2017-0224 sukserm, s. (2007). Quality of earnings analysis for the government banks. chiangmai university. suttipun, M. (2023). esg performance and corporate financial risk of the alternative capital market in thailand. Cogent Business & Management, 10(1), 290. https://doi.org/10.1080/23311975.2023.2168290 the stock exchange of thailand. (2017). Corporate governance code for listed companies 2017. the stock exchange of thailand. theophillus, r. A., & oyesola, s. r. (2018). earning quality and firms financial performance: A missing line in the listed firm in nigeria. International Journal of Accounting & Finance, 7(2), 32–54. tjahjadi, B., soewarno, n., & Mustikaningtiyas, F. (2021). good corporate governance and corporate sustainability performance in indonesia: A triple bottom line approach. Heliyon, 7(3), e06453. https://doi.org/10.1016/j.heliyon.2021.e06453 tontiset, n. (2015). the factors affecting of quality of financial statement and decision-making effectiveness of listed companies in the stock exchange of thailand. Srinakharinwirot Business Journal, 6(2), 20–35. torchia, M., & calabrò, A. (2016). Board of directors and financial transparency and disclosure. evidence from italy. Corporate Governance, 16(3), 593–608. https://doi.org/10.1108/cg-01-2016-0019 tulcanaza-prieto, A. B., & lee, Y. h. (2022). real earnings management, firm value, and corporate governance: evidence from the Korean Market. International Journal of Financial Studies, 10(1), 19. https://doi.org/10.3390/ ijfs10010019 tummanon, W. (2006). New dimensions of financial statements and analysis. dhammaniti. ullah, i., Majeed, M. A., Fang, h. X., & Khan, M. A. (2020). Female ceos and investment efficiency: evidence from an emerging economy. Pacific Accounting Review, 32(4), 443–474. https://doi.org/10.1108/pAr-08-2019-0099 utama, c. A., utama, s., & Amarullah, F. (2017). corporate governance and ownership structure: indonesia evidence. Corporate Governance: The International Journal of Business in Society, 17(2), 165–191. https://doi.org/10.1108/ cg-12-2015-0171 Wahyudin, A., & solikhah, B. (2017). corporate governance implementation rating in indonesia and its effects on financial performance. Corporate Governance, 17(2), 250–265. https://doi.org/10.1108/cg-02-2016-0034 Watts, r. l. (2003). conservatism in accounting part i: explanations and implications. Accounting Horizons, 17(3), 207– 221. https://doi.org/10.2308/acch.2003.17.3.207 Wintoki, M. B., linck, J. s., & netter, J. M. (2012). endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581–606. https://doi.org/10.1016/j.jfineco.2012.03.005 World Bank Blogs. (2009). thailand’s economy in 2010: growth in balance. https://blogs.worldbank.org/astasia epacific/thailands-economy-in-2010-growth-in-balance cogent Business & MAnAgeMent 17 Worokinasih, s., & Zaini, M. l. Z. B. M. (2020). the mediating role of corporate social responsibility (csr) disclosure on good corporate governance (cg) and firm value. Australasian Accounting, Business and Finance Journal, 14(1), 88–96. https://doi.org/10.14453/aabfj.v14i1.9 Wutthisingchai, t. (2019). The relationship between Corporate Governance Scoring Corporate Governance and Director Compensation in Thai Listed Companies in MAI during 2016-2018. college of innovative Business and Accountancy, Dhurakit pundit university. Zalata, A. M., ntim, c., Aboud, A., & gyapong, e. (2019). Female ceos and core earnings quality: new evidence on the ethics versus risk-aversion puzzle. Journal of Business Ethics, 160(2), 515–534. https://doi.org/10.1007/ s10551-018-3918-y Zalata, A. M., ntim, c. g., Alsohagy, M. h., & Malagila, J. (2022). gender diversity and earnings management: the case of female directors with financial background. Review of Quantitative Finance and Accounting, 58(1), 101–136. https://doi.org/10.1007/s11156-021-00991-4