Abstract

Purpose: This study investigates the effect of corporate governance on financial performance by taking into account the mediating effect of earnings management.

Design: By using a structural equation modeling and partial least squares approach and a sample of listed banks in Indonesia observed between 2010 and 2015, this research proves that good corporate governance has a significant effect on earnings management and, in turn, that earnings management has an adverse impact on a company’s financial performance.

Findings: An increase in managerial and institutional ownership leads to a decrease in earnings management, which can improve a company’s financial performance.

Originality: This research shows that by applying good corporate governance mechanisms, a company can avoid agency conflicts, minimize earnings manipulation by managers, and obtain reliable company performance valuations.

Keywords: corporate governance, corporate financial performance, earnings management, institutional ownership, managerial ownership, Indonesia

How to Cite:

Rizani, F., Syam, A. & Lisandri, L., (2022) “Mediating Effect of Earnings Management on Financial Performance: The Importance of Good Corporate Governance”, Australasian Accounting, Business and Finance Journal 16(4), 14-28. doi: https://doi.org/10.14453/aabfj.v16i4.3