After is a tentative statement of the

After defining this study`s framework,
this section discusses the relationship between independent and the dependent
variables to formulate this study`s research hypotheses. This section discusses
the association between the four groups of independent variables highlighted
above (i.e., board characteristics, audit committee characteristics, ownership
structure and company attributes) and earnings management measured by
manipulation of real activities. In addition, the moderating impact of
managerial ownership on  relationship
between corporate governance and management of earnings is presented in this
section.

Hypothesis is a tentative statement of the
association between two or more variables, which are constantly in the form of
sentences that function as directors for examination in the entire procedure of
the research work. The following hypotheses are developed to examine whether
all the independent variables will predict the dependent variable and whether
moderating variable can affect their relationship. Recent evidence shows that
the fundamental problem of earnings management need proper investigation (Cohen
et al., 2008; Kang & Kim, 2012). This study introduces managerial ownership
as moderating variable to examine what kind of relationship exists between real
management earnings as well as the corporate governance attributes

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3.3.1 The
Size of the Board and Earnings Management

The
size of the board is believed to be the elementary aspect of the effective
decision making. Vafeas (2005) suggested that the size of the board and  performance of the board had a non-linear
relationship. Too small and too large of board size is likely to make it
ineffective. Lipton and Lorsch (1992) recommended that the ideal board size
should not exceed eight or nine directors. Jensen (1993) claimed that when the
board is more than seven or eight members, it is less effective because of the
coordination and process problem, which in turn adds to weak monitoring.   

However,
there has been a myriad of studies conducted on the relationship between size
of the board and the management of earning. Amran, Ishak, and
Abdul-Manaf (2016) found that board size has negative effect on
earning management, indicating that board size could curb the real activities
in the companies. Likewise, Obigbemi et al. (2016), in their research on board
size-earning management relationship, with focus on 137 quoted companies in
Nigeria found negative significant relationship between the size of the board and
the management of earnings. It is argued that there is need for enforcement of
the rule on large board size, and that a board size of five may not be
appropriate; thus, the minimum board size should be increased. Additionally,
Iraya et al. (2015) found that earnings management is negatively related to
board size. Patrick et al. (2015) in their findings reveal that board size, has
significant influence on the practices of earnings management.

In Jordan context, Abbadi, Hijazi and
Rahahleh (2016) explores  effects of the
quality of corporate governance on the management of earnings practices in
Jordan. The study employs five-year financial data ranging from 2009 – 2013
obtained from listed firms in Amman Stock Exchange (ASE). Using panel data
analysis, the study found that there is negative significant relationship
between the size of the board as well as management of earnings. On similar
note, Abed, Al-Attar and Suwaidan (2012) examined the relationship between the size
of the board and the management of earnings. This current study uses sample of
non-financial organization in Jordan for four years ranging from 2006 –
2009. They found out that the size of board of directors has negative
significant relation with earnings management.

On the other hand, previous studies report
positive results on the correlation between board size and earnings management.
For example, Rahman and Ali (2006); Gonzalez and Garcia-Meca (2014) examined
the effect of board size on the earnings management and that size of the board
is positively associated with earnings management activities. Consequence,
large size board is less likely to yield fruitful discussions as there would be
too many members attempting to share their opinions. As a result, meetings or
discussions become more time consuming and reaching crucial decision will be
more challenging. Furthermore, decision making is slow in large board and there
is also high-risk aversion. Moreover, members in large-sized board also have
the tendency to depend on other members in safeguarding the environment. All
these are the reasons why large boards have lower level of success.
Nonetheless, the problem of board overcapacity still occurs, and this is due to
changes in physical and management technology and also in organizational
practices (Jensen, 1993).

An opposing viewpoint is the management of
earnings drops with larger size of the board. Firstenberg and Malkiel (1994)
claimed that, the smaller boards size have the inability of achieving their
stated objectives of generating a numerous viewpoints and challenging the
auditors on certain matters reportage. In addition, the constraint in relation
to size can limit the experience of the members of the board. Increasing the size
of the board also lead to an increases in the possibility of including certain
number directors on the board with relevant knowledge in financial reporting
and auditing experience (Beasley & Salterio, 2001).

Although research findings on
relationship between the size of board as well as that of the management of
earnings is mixed, and not been proven empirically, majority of the studies
indicate negative relationship. That because, the selection of
board size is based on the statements of agency theory regarding the
relationship between owners and corporate managers. The relationship between the
size of the board and earnings management has been explained with the assistance
of agency theory since large board size are expected to have more experts,
additional information to decrease information asymmetry in view of corporate
managers being more inform than other stakeholders (Jensen & Meckling,
1976).

Agency
theory postulates the monitoring role of the boards to minimize or mitigate
agency problem. Bigger boards are more capable of committing
their time and effort on management oversight and the consequent minimalized
agency problem, but small boards are more susceptible to failure in detecting
earning management (Monks & Minow, 2011). Given
this and underpinned by agency theory, the
current study, therefore, holds that there are the larger the size of the
board, the better the mechanism of mitigating earnings management practices,
and thus postulates below hypothesis:

H1: There is a
negative relationship between the size of board, and management of earnings in
listed industrial and service firms in Jordan.

x

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