Corporate Governance and Quality of Financial Reporting in Emerging Markets: A Structured Literature Review

Abstract

This article is a structured literature review (SLR) on the role of corporate governance (CG) in ensuring/improving the quality of financial reporting (FRQ) in emerging markets and identify avenues for future research. A rigorous search strategy applied across several databases resulted in 51 articles. A detailed analytical framework is used to analyse and synthesise these articles. SLR reveals five major themes of research: regulation, comparative analysis, specificities of country, political connections, and religion. These themes are examined by the selected articles using archival data of non-financial listed firms. This SLR contributes to academia and practice by providing a comprehensive descriptive analysis of the characteristics of articles; synthesising the existing research using a detailed categorisation analysis based on a comprehensive review of themes researched, measurement of CG and FRQ, methodology used, findings and use of interaction terms; and suggesting the avenues for future research. To the best of our knowledge, this study is the first to take a detailed account of the role of CG to ensure FRQ in emerging markets.

Keywords

Audit committee board of directors corporate governance earnings management ownership structure quality of financial reporting

Introduction

This article aims to review the literature on corporate governance (CG) in ensuring/improving the quality of financial reporting (FRQ) in emerging markets and identifying avenues for future research. FRQ results from the interaction between the quality of accounting standards and preparers’ incentives to supply quality information (Ball et al., 2003). CG at the firm and country level plays a vital role in shaping preparers’ incentive to use discretion allowed by accounting standards and conceal any material information. The effectiveness of CG at firm level and country level in ensuring FRQ depends on investor protection strength. It is an essential part of the legal institutions in a country (La Porta et al., 1997, 1998). It has a bearing on the choice of corporate policies (La Porta et al., 2000; Shleifer & Vishny, 1997). Weak investor protection enables the insiders to acquire private benefits and conceal information about firm performance, thereby affecting FRQ (Leuz et al., 2003).

The argument’s central idea is that the interaction between property rights and institutional arrangements shape economic behaviours (Alchian, 1965; Coase, 1937, 1960). According to the property rights literature, both state and individuals can enforce property rights. The weak enforcement of property rights by the state leads to ownership concentration and family firms and business groups’ formation. Such firms/groups face lower information asymmetry and transaction costs among affiliated firms. It also facilitates internal markets when financial, managerial, and other factor markets are weak (Claessens & Fan, 2002). However, the agency problems arising between dominant and minority shareholders (Type-II agency problems) offset these benefits. The conventional CG mechanisms that effectively mitigate principal–agent conflicts arising in dispersed ownership (Type-I agency problems) are not strong enough to mitigate Type-II agency problems.

Most of the emerging markets have concentrated ownership structure and, thus, Type-II agency problems. Their institutional arrangements are significantly different from developed markets characterised by dispersed ownership. Thus, their public governance (Claessens & Fan, 2002), CG at the firm level (Claessens & Yurtoglu, 2013) and earnings quality (Bhattacharya et al., 2003; Leuz et al., 2003) are also different. Nevertheless, the emerging markets are now making significant efforts to improve their CG systems and FRQ and disclosure.

With this backdrop, we formulate three interrelated questions:

How has the research that inquired into CG’s role to ensure FRQ in the emerging markets developed?

What has been the focus of past studies examining CG’s role to ensure FRQ in the emerging markets?

What is the scope of future research in understanding CG’s role to ensure FRQ in the emerging markets?

To answer these questions, we conduct a structured literature review (SLR) following Massaro et al. (2016). There are four sections in this article. The methodology section outlines the search strategy, criteria for selecting articles and analytical framework used for conducting the review. The results and discussion section answer the first two research questions using the analytical framework. The fourth section discusses the scope of future research, and the last section presents the concluding remarks.

Methodology

In this study, we adopt an SLR variant, as suggested by Massaro et al. (2016). Unlike the traditional review, it adopts a replicable, scientific, and transparent literature search process that minimises the researcher’s bias in the review process. We customise the basic guidelines suggested by them, as shown in Figure 1.

Figure 1.

Source: The authors.

The subsections below explain in detail the SLR process followed by us.

Defining Research Questions

Critical research has three tasks: insight, critique and transformative redefinitions (Massaro et al. 2016). Each task answers a specific research question. To accomplish these tasks for our study, we formulate three interrelated questions, as mentioned in the Introduction section.

Search Strategy¹

This section outlines the process followed for article search and article selection. It is essential to report this process in detail in order to facilitate the replication of research. The search strategy uses keywords search and database search. It includes identifying keywords, choosing the appropriate source for searching (database) and the definition of search strings to search articles within the database.

Identification of Keywords

The identification of appropriate keywords is the most vital step to search relevant articles. The focus of this study is FRQ and CG. To identify the maximum number of articles, we use keywords such as FRQ, financial reporting (FR) quality, accounting quality and CG.

Database Search

After the identification of appropriate keywords, the researcher needs to identify sources to conduct an article search. At this stage, it is necessary to decide where to search (database), where to search within the database (title, abstract and keywords) and scope (period).

Following Massaro et al. (2016), we use the publisher databases for article search because the search engines for the journals return more accurate search than an Internet search. To ensure that relevant articles are retrieved, the use of multiple search engines is advisable. This study uses several publisher databases such as Scopus, Emerald, Wiley Online Library, EBSCOhost, ScienceDirect, Taylor & Francis, SAGE Journals, SpringerLink and JSTOR for keyword search.

These databases provide the option to conduct keyword search within the title or abstract or keywords of the articles or the entire article. It is advisable to conduct keywords search within the title, abstract and keywords of the article because searching the entire article can result in too many irrelevant articles (Massaro et al., 2016). For this study (refer to Table 1), we use the search within title and abstract for FRQ as the title may not refer to the FRQ. However, the abstract may mention that the study attempts to capture it. For CG, we use search in all fields to retrieve articles examining different aspects of CG in emerging markets.

Table 1.

Search Strings Used for Automatic Search in Databases.

Keywords Used in Search String	Boolean Operator	Search String	Search in
Corporate governance, ‘quality of financial reporting’	AND	[corporate AND governance] AND [‘quality of financial reporting’]	Corporate governance—anywhere/all fields ‘quality of financial reporting’—title and abstract
Corporate governance, ‘financial reporting quality’	AND	[corporate AND governance] AND [‘financial reporting quality’]	Corporate governance—anywhere/all fields ‘financial reporting quality’—title and abstract
Corporate governance, ‘accounting quality’	AND	[corporate AND governance] AND [‘accounting quality’]	Corporate governance—anywhere/all fields ‘accounting quality’—title and abstract

Source: The authors.

Scope (period): We did not limit the period of publication to any specific year. However, after applying the inclusion and exclusion criteria, the period was confined from 2002 to the year 2018. The first paper that meets the selection criteria was published in 2002 in Accounting & Finance (Goodwin & Seow, 2002). The last paper was published in 2018.

Definition of Search Strings

The publisher database’s search engines have an automatic and algorithmic assessment for the search string. An appropriately defined search string can aid in the specific and relevant search of articles and reduces the number of irrelevant articles to a great extent. Table 1 presents search strings used for conducting articles search along with the keywords and Boolean operators.

We applied all the search strings to the selected databases and retrieved 1,917 articles in total. Following Tranfield et al. (2003), we used inclusion and exclusion criteria for selecting articles at two stages; first, during the preliminary examination and second during the detailed examination.

Inclusion Criteria

Articles that explicitly deal with the relationship between CG and FRQ in emerging markets.

Articles that explicitly deal with the relationship between CG and FRQ in a cross-country (including emerging markets) setting.

Articles that explicitly examines and measures the FRQ and CG in emerging markets.

Articles that mention that their findings contribute to the FRQ literature if they measure FRQ individually.

Exclusion Criteria

Articles that mention CG and FRQ in abstract only and do not address them as the primary focus.

Articles that address CG and FRQ, but the primary focus remains the relationship between CG or FRQ with various other factors such as performance and debt contracting.

Articles that use FRQ and CG as mediating or moderating variables rather than examine each other’s direct effect.

After the preliminary screening of title and abstract using inclusion and exclusion criteria, and eliminating duplicate articles, the total articles retrieved (1,917) reduced to 51 relevant articles.² Subsequently, a detailed examination of the remaining articles was conducted using inclusion and exclusion criteria. Figure 2 presents the article selection and elimination process at various stages in the search process.

Figure 2.

Source: The authors.

Quality Assessment

We use publication in peer-reviewed journals indexed in WoS and Scopus and ranked by ABDC for articles’ quality assessment. The articles under review are published in journals ranked by ABDC and indexed in WoS or Scopus or both.

Analytical Framework

The analytical framework provides the basis for reviewing the selected articles (refer to Table 2). It provides a basis for descriptive analysis as well as categorisation analysis. The descriptive analysis aims to provide insights about the selected articles’ general characteristics and categorisation analysis delves deeper to answer the research questions.

Table 2.

Analytical Framework.

Code	Classification System for Analysing Articles	Number of Articles	%
Code	Category	Number of Articles	%
A	Descriptive statistics of articles
A1	Distribution of articles by journals
A2	Distribution of articles by field of research codes of journals
A2.1	Accounting	19	55
A2.2	Business and management	8	22
A2.3	Economics	5	10
A2.4	Banking, finance and investment	4	10
A2.5	Law and legal studies	2	4
A3	Distribution of articles by year of publication
A4	Distribution of articles by databases and indexing
A5	ABDC classification	51	100
A5.1	A*	5	10
A5.2	A	17	33
A5.3	B	11	22
A5.4	C	18	35
B	Article impact—citations
C	Research methods	51	100
C1	Archival	45	88
C2	Archival and survey	1	2
C3	Experiment	1	2
C4	Survey	4	8
D	Sources of data
E	Focus of the article
F	Mapping of theories financial reporting and disclosure and corporate governance mechanisms
G	Jurisdiction	51	100
G1	Single country	33	65
G2	Two countries	1	2
G3	Regional group	9	18
G4	Cross-country	8	16
H	Organisational focus	51	100
H1	Non-financial listed firms	47	93
H2	Financial firms	4	7
I	Unit of analysis	51	100
I1	Financial firms	4	8
I2	Country	1	2
I3	Non-financial firms	44	86
I4	Directors and auditors	1	2
I5	Preparers, auditors, regulators and users	1	2
J	Conceptualisation of FRQ	51	100
J1	Yes	14	27
J2	No	37	73
K	FRQ proxy
L	Types of corporate governance mechanisms	51	100
L1	Internal	23	45
L2	External	4	8
L3	Country	11	22
L4	Internal and external	3	6
L5	Internal and country	4	8
L6	External and country	2	4
L7	Internal, external and country	4	8
M	Number of corporate governance mechanisms	51	100
M1	One	32	63
M2	Two	10	20
M3	Three	2	4
M4	Four	1	2
M5	Five	1	2
M6	Composite score	5	10
N	CG proxy
O	Techniques of analysis
P	Findings
Q	Robustness test
R	Interaction term

Source: The authors.

Note: Bold indicates main category of article classification. These are followed by sub-categories therein.

Data Extraction Form

The selected articles are coded based on the analytical framework using a data extraction form. The data extraction form is a record that contains information about the articles. It includes title, author/s, publication year, journal name, database, country, sample, methodology and significant findings. It helps in reducing human error and bias while conducting a review and provides a basis for data synthesis (Tranfield et al., 2003). We have used Microsoft Excel to prepare a data extraction form.

Develop Insights and Critique Data Set

Developing insights and critiquing data set³ deals with data synthesis. Data synthesis aims to summarise and integrate the characteristics and findings of articles under review to address the proposed research questions. We use descriptive statistics, tables and graphs to develop insights into a category within the analytical framework. We aim to synthesise the data using descriptive analysis (general characteristics) and categorisation analysis (classification scheme). The next section explains it in detail.

Results and Discussion

In this section, we use descriptive analysis and categorisation analysis to answer the first two research questions. This section presents descriptive and detailed data analysis, as reported in Tables 2 –7 and Figures 3 –13.

Table 3.

Data Sources.

Country/Regional Block/Cross-Country	Data Sources	Data
European Union and cross-country	Amadeus—Bureau van Dijk database, Bloomberg database, BoardEx, Thomson ONE, LexisNexis, Compustat Global and Compustat North America, I/B/E/S international database, OSIRIS, Worldscope, Datastream	Ownership, accounting, stock market, governance, analyst forecast
MENA region	Bankscope, Datastream, The Financial Times’ Banker Databases, Thomson Reuter’s Zawya	Accounting
China	CCER China Stock Database, China Centre for Economic Research, China Stock (Securities) Market and Accounting Research Database	Ownership, data on privately owned enterprises, accounting
Singapore	Compustat Global	Accounting, stock market
Malaysia	Compustat Global, Datastream, OSIRIS, Thomson Financial ONE Banker database	Accounting, financial restatements
Korea	Data Analysis, Retrieval and Transfer System (DART), KIS VALUE II database, Korea Corporate Governance Service, OSIRIS, Korean Information Service (KIS) database	Annual and audit report, ownership, governance, accounting, stock market,
Venezuela	Mint Global database (Bureau van Dijk)	Accounting
Taiwan	Taiwan Economic Journal database	Financial restatements
Hong Kong	PACAP database	Accounting
Russia	UBS Brunswick’s ‘Russian Equity Guides’	Accounting, corporate governance

Source: The authors.

Table 4.

Mapping Financial Reporting and Disclosure and Corporate Governance Mechanisms to Theories.

Theories	FR & Disclosure	BOD	AC	Ownership	Auditor	Religion
Agency theory	X	X	X	X	X	–
Actor–network theory	–	–	X	–	–	–
Capital market theory	X	–	–	–	–	–
Integrated theory of integrity	X	X	X	X	–	–
Institutional theory	–	–	X	–	–	–
Litigation cost theory	X	–	–	–	–	–
Power theory	–	–	X	–	–	–
Proprietary cost theory	X	–	–	–	–	–
Resource dependence theory	–	X	X	–	–	–
Signalling theory	X	–	–	–	–	–
Stage development theory	–	–	–	–	–	X
Stakeholder theory	–	–	–	X	–	–
Active monitoring and transient hypothesis	–	–	–	X	–	–
Bonding hypothesis	–	–	–	–	X	–
Accountability based framework	X	–	–	–	–	–
Corporate control contest	X	–	–	–	–	–
Stock compensation hypothesis	X	–	–	–	–	–
Cognitive biases: Behavioural finance	–	–	–	X	–	–
Demand and supply hypotheses	–	–	–	X	–	–
Contracting hypothesis (compensation contract)	X	–	–	–	–	–
Economic cost and benefit hypotheses (ethics)	–	–	–	–	–	–
Efficient market hypothesis	X	–	–	–	–	–
Knowledge spillover hypothesis	–	–	–	X	X	–
Passive hands-off hypothesis	–	–	–	X	–	–
Reciprocity hypothesis	–	X	–	–	–	–
Reputational capital and extended interlocking	–	–	X	–	X	–

Source: The authors.

Table 5.

Measurement of FRQ.

FRQ Proxy	Source/Measurement of Proxy
Earnings persistence	The coefficient on current period earnings in a regression of future earnings on current earnings
Earnings smoothness	Lang et al. (2003), Bhattacharya et al. (2003), Ahmed et al. (1999), Kanagaretnam et al. (2004), Fonseca and Gonzalez (2008)
Timely loss recognition	Ball and Shivkumar (2005, 2006), Basu (1997), Khan and Watts (2009), Ball et al. (2000), Nichols et al. (2009)
Target beating	Bhattacharya et al. (2003): earnings interval, security gains and losses
Real earnings management	Roychowdhury (2006): sales manipulation, production costs and discretionary expenses
Discretionary accruals	Dechow et al. (1995), Kasznik (1999), Francis et al. (2004), Burgstahler et al. (2006), Jones (1991), DeFond and Park (2001)
Performance adjusted discretionary accruals	Ashbaugh et al. (2003), Kothari et al. (2005), Chen et al. (2010), Sun et al. (2010)
Current accruals	Tucker and Zarowin (2006) modified by Chen et al. (2010), Francis et al. (2005), Dechow and Dichev (2002), Chen et al. (2007) as modified by McNichols (2002), regression of abnormal working capital accruals on inverse of lagged assets and change in revenue minus change in receivables
Discretionary revenues	Chen et al. (2010), McNichols and Stubben (2008), Stubben (2010), Chen et al. (2007)
Discretionary loan loss provision	Quttainah et al. (2013)
Earnings response coefficient	Collins and Kothari (1989), Ding et al. (2011), Kothari (2001)
Value relevance	Earnings informativeness, Barth et al. (2008), Easton and Harris (1991), Francis et al. (2004), Francis and Schipper (1999), Ohlson (1995), Dechow et al. (1995)
Restatements	Dummy variable for restatements and who initiated a restatement, duration (number of years financial statements are restated), pervasiveness (number of account groups involved in restatements), reasons for restatements (accounting rule application failures, misrepresentation, irregularities)
Internal control weakness	Perception
Errors in financial statements	Perception
Fraud	Perception
Modified audit opinion	Firms for which modified audit opinions are issued
Disclosure quality	Disclosure scores by Tehran Stock Exchange, CIFAR, self-constructed disclosure index
Qualitative characteristics	Interval scale
Composite measure	Normalisation and average of individual measures, Biddle et al. (2009), Bhattacharya et al. (2003)
Audit quality	Big 4 auditor, audit delay (lag between fiscal year end and signature date)
Banking	Future loan write-offs, probability of having loss, probability of having large LLP, probability of having low capital

Source: The authors.

Table 6.

CG Proxies.

CG Mechanism	CG Proxy	Frequency	Measurement	Author/s
Political connection	Connection with government officials and ruling party members	1	Interview	Batta et al. (2014)
Political connection	Bureaucratic ranks	1	Score based on bureaucratic ranks	Liu et al. (2017)
Regulation	ICFR regulation	1	Dummy	Oh et al. (2014)
	8th Company Law Directive	1	Dummy	Bajra and Cadez (2018)
	Regulatory quality	1	Scores at country level	Isidro and Raonic (2012)
	Rule of law	3	Scores at country level, Kaufmann et al. (2007), Daske et al. (2008), La Porta et al. (1998)	Isidro and Raonic (2012), Bonetti et al. (2016), Kanagaretnam et al. (2014)
	Securities law	1	Dummy	Fung et al. (2013)
	Government reforms	1	Dummy	Ahmed (2013)
	Efficiency of judicial system	1	La Porta et al. (1998)	Kanagaretnam et al. (2014)
	Law and order index	1	World annual report data	Kanagaretnam et al. (2014)
Religion	Shariah firm	1	Dummy for Shariah firm	Ismail et al. (2015)
	Size of Shariah board	1	Size of Shariah board	Kolsi and Grassa (2017)
	Islamic bank	1	Dummy for Islamic bank	Abdelsalam et al. (2016)
Company code (Ethics)	Strength of company’s code of ethical conduct	1	Perception (Experiment)	Goodwin and Seow (2002)
	Corporate commitment to business ethics	1	Ethical commitment index developed by Choi and Jung (2008)	Choi and Pae (2011)
	Covalence Ethical Quote (CEQ)	1	Quarterly change announcements	Elayan et al. (2016)
Composite measure	Firm-level governance	1	Binary variable at median split. Board independence, presence of audit committee, audit committee size, audit committee independence, audit committee financial expertise, institutional shareholding	Bonetti et al. (2016)
CG score	1	Composite score of protection of shareholder rights, board of directors, corporate disclosure, audit committee and dividend policy as well as individual score for each category. (Based on Korea Corporate Governance Service)	Kwon et al. (2014)
Brazilian CG Index	1	Disclosure, board composition and performance, ownership structure and control, and shareholder rights—total 15 questions	Lopes et al. (2016)
CG	1	Interview	Barghathi et al. (2017)
Corruption	Control of corruption	1	Country’s score	Isidro and Raonic (2012)
Corruption	Corruption perception index	1	Corruption Perceptions Index (CPI) (2003)—International Transparency	Malagueño et al. (2010)
Culture	Secrecy	1	Gray (1988), Hofstede (1980)—Uncertainty avoidance plus power distance minus individualism	Hope et al. (2008)
Debt		1	Debt to total assets	Isidro and Raonic (2012)
External financing needs		1	Required investment to grow minus the proportion of earnings that are reinvested	Isidro and Raonic (2012)
Expropriation risk		1	Non-managerial employee headcount	Batta et al. (2014)
Business risk of expropriation		1	La Porta et al. (1998)	Kanagaretnam et al. (2014)
Investor protection			Scores at country level—Board independence, protection of minority shareholder rights, enforcement of accounting and auditing standards, judicial independence, enforcement of securities law and freedom of press	Houqe et al. (2012)
Legal origin		1	Dummy variable for H-shares firm	Fung et al. (2013)
Legal origin		1	Compare timely recognition of income in common and code law countries	Ball et al. (2003)

Source: The authors.

Table 7.

Findings: Relationship Between CG and FRQ.

CG Mechanism	Positive	Negative	Not Related
Audit committee
Independence	Salehi and Shirazi (2016), Bradbury et al. (2006), Mohammed et al. (2017)		Kusnadi et al. (2016), Salehi and Shirazi (2016), Oussii and Taktak (2018)
Accounting expertise	Kusnadi et al (2016), Nelson and Devi (2013)
Financial Expertise	Salehi and Shirazi (2016), Oussii and Taktak (2018)		Kusnadi et al. (2016), Salehi and Shirazi (2016), Mohammed et al. (2017)
Other expertise	Nelson and Devi (2013)		Kusnadi et al. (2016)
Meetings	Kolsi and Grasa (2017)	Salehi and Shirazi (2016)	Salehi and Shirazi (2016), Oussii and Taktak (2018)
Size			Salehi and Shirazi (2016), Kolsi and Grassa (2017), Mohammed et al. (2017), Oussii and Taktak (2018)
Composite score	Zgarni et al. (2016)
Authority			Oussii and Taktak (2018)
Board of directors
CEO duality	Mohammed et al. (2017)	Alfraih (2016)	Yasser and Mamun (2016), Yasser and Mamun (2015), Bradbury et al. (2006), Abdelsalam et al. (2016)
Gender diversity	Alfraih (2016)		Yasser and Mamun (2016), Yasser and Mamun (2015)
Composite score	Krismiaji et al. (2016)		Johl et al. (2013)
Board busyness	Alfraih (2016), Hundal (2016)
Director training programme	Yasser et al. (2017b)	Yasser et al. (2017b) (some measures and some countries)
Accounting and financial expertise	Huang et al. (2016)
Family members		Alfraih (2016)
Size	Alfraih (2016), Bradbury et al. (2006)		Mohammed et al. (2017)
Independence	Mohammed et al. (2017), Abdelsalam et al. (2016), Kolsi and Grassa (2017)		Bradbury et al. (2006)
Political Connection		Mohammed et al. (2017)
Country specific		Kolsi and Grassa (2017) (Accounting and Auditing Organization for Islamic Financial Institutions [AAOIFI] members)	Mohammed et al. (2017) (Bumiputera Malay), Alfraih (2016)
Independent director cash compensation		Ye (2014)
Auditor
Tenure	Alzoubi (2018)	Zgarni et al. (2016) (post-law)	Zgarni et al. (2016)
Audit fees	Isidro and Raonic (2012), Alzoubi (2016a, 2018)
Industry specialisation	Alzoubi (2018), Zgarni et al. (2016)
Size	Han et al. (2012), Zgarni et al. (2016), Alzoubi (2016a, 2018)		Huang et al. (2016)
Non-audit fees	Wahab et al. (2014)		Alzoubi (2018), Mohammed et al. (2017)
Ownership structure
Foreign ownership	An (2015), Yasser et al. (2016), Abdelsalam et al. (2016), Alzoubi (2016b)	–	Yasser et al. (2017a)
Ownership concentration	Yasser et al. (2016)	–	Yasser et al. (2017a)
Institutional ownership	Yasser et al. (2016), Alzoubi (2016b)	–	Yasser et al. (2017a), Kolsi and Grassa (2017)
State ownership	Yasser et al. (2016), Abdelsalam et al. (2016)	–	Yasser et al. (2017a), Mohammed et al. (2017)
Associated company/group ownership	–	–	Yasser et al. (2016)Yasser et al. (2017a)—mixed results
Public ownership	–	–	Yasser et al. (2016), Yasser et al. (2017a)—mixed results
Mutual fund ownership	Chan et al. (2014)	–	–
Privately owned enterprise	–	Chan et al. (2014)	–
Insider managerial ownership	Alzoubi (2016b)	Mohammed et al. (2017)	–
Outside managerial ownership	–	–	Alzoubi (2016b)
Block holding	Alzoubi (2016b)	Kolsi and Grassa (2017)	–
Foreign strategic investors	Wu et al. (2015)	–	–
Non-state-owned firm	–	–	Huang et al. (2016)
Family firms	–	–	Sue et al. (2013)
Divergence between control and cash flow rights	–	–	Sue et al. (2013)
Political connection	Batta et al. (2014)	–	Liu et al. (2017) (inverse U-shaped)
Regulation	Oh et al. (2014)	Bajra and Cadez (2018)	Houqe et al. (2012), Fung et al. (2013), Ahmed et al. (2013)
Religion	Ismail et al. (2015), Abdelsalam et al. (2016), Kolsi and Grassa (2017)	–	–
Company code	Choi and Pae (2011), Elayan et al. (2016)	–	–
Corruption perception index	–	Malagueño et al. (2010)	–
Culture (secrecy)	–	Hope et al. (2008)	–
Debt, external financing needs	Isidro and Raonic (2012)	–	–
Expropriation risk	–	Batta et al. (2014)	–
Investor protection	–	Fung et al. (2013)	Houqe et al. (2012)
Legal origin	Ball et al. (2003)	–	–
Composite score	Kanagaretnam et al. (2014) (political economy, regulation), Bonetti et al. (2016) (board monitoring mechanisms), Kwon et al. (2014) (CG score), Lopes et al. (2016) (CG index), Isidro and Raonic (2012) (regulatory quality, corruption)	–	–

Source: The authors.

Figure 3.

Source: The authors.

Figure 4.

Source: The authors.

Figure 5.

Source: The authors.

Figure 6.

Source: The authors.

Figure 7.

Source: The authors.

Figure 8.

Source: The authors.

Figure 9.

Source: The authors.

Figure 10.

Source: The authors.

Figure 11A.

Source: The authors.

Figure 11B.

Source: The authors.

Figure 11C.

Source: The authors.

Figure 11D.

Source: The authors.

Figure 11E.

Source: The authors.

Figure 12.

Source: The authors.

Figure 13.

Source: The authors.

Descriptive Analysis

The descriptive analysis focuses on the general characteristics of the articles under review. The distribution of articles by journals, year of publication, publisher database, indexing, ABDC ranking, article impact, research methods and data sources form the basis of descriptive analysis.

Distribution of Articles by Journals

The articles used in this review come from 38 journals. The highest number of articles, three, are published in the Journal of Accounting and Public Policy and Journal of Business Ethics each. The remaining articles come equally from other journals. Based on the field of research (FoRs)⁴ codes, these 38 journals are categorised into five areas: (a) accounting; (b) business and management; (c) economics; (d) banking, finance and investment; and (e) law and legal studies. As the study’s focus is FRQ, the maximum number of articles come from accounting journals (55%). However, CG draws on various disciplines, and hence, articles also come from journals comprising areas such as business, management, economics, banking, finance, investment and law areas. Thus, a plethora of avenues is available for publication in this field.

Distribution of Articles by Year of Publication

In the period between 2002 and 2011, there has been limited research focusing specifically on FRQ and CG’s role in improving FRQ in emerging markets. After 2012, there has been an increase in research focusing on CG and FRQ in emerging markets. The year 2016 has the highest number of articles (29%). In 2018, the number of articles is only 2, as the article search was conducted between February and March 2018.

Distribution of Articles by Publisher Database and Indexing

The highest proportion of relevant articles come from Emerald Insight (37%), followed by ScienceDirect (27%). The majority of articles (67%) are published in journals indexed in both Scopus and WoS. The remaining articles are indexed either in Scopus or WoS.

Distribution of Articles by ABDC Ranking

Australian Business Deans Council (ABDC) ranking categorises journals in four categories: A*, A, B and C. The highest number of articles belong to C category journals followed by A category journals.

Article Impact

The number of citations and citations per year (CPY) is used to measure article impact. We use Google Scholar as a citation index to measure article impact as it has a broad coverage of publications (Serenko & Bontis, 2013). Ball et al. (2003) is the most cited article. It makes this article a must-read for any scholar exploring FRQ in emerging markets. It emphasises the dominance of preparers’ incentives over the quality of accounting standards in determining FRQ. Moreover, examining preparers’ incentives in FR in the wake of the adoption of International Financial Reporting Standards (IFRS), a principle-based accounting regime is an upcoming area of research in this field (Christensen et al., 2015). The CPY is used to allow easier comparison between the citations of classic articles vis-a-vis recent articles that may not have many citations (Dumay, 2014), but indicate an emerging research agenda. Most notably, these are newer articles from 2011 onwards, for example, recent articles such as Kusnadi et al. (2016), Abdelsalam et al. (2016) and Kanagaretnam et al. (2014). Abdelsalam et al. (2016) and Kanagaretnam et al. (2014) focus on FRQ in banks under different monitoring mechanisms, namely religion (Shariah principles) and institutional factors, respectively. Kusnadi et al. (2016) focus on the role of audit committees in ensuring FRQ.

Distribution of Articles by Research Methods

The accounting research methods are categorised into archival, experimental, field study, review, survey, theoretical and normative (Oler et al., 2010). We use this categorisation to classify the articles under review by research methods. The majority of articles (88%) use the archival method of research due to ease in data collection and management and databases’ availability. The significant implication of the use of archival data is on the proxy used to capture FRQ. Very few articles (12%) use surveys and experimental research methods to examine CG’s role in improving FRQ.

Data Sources

Table 8 provides a country-wise overview of the sources used to extract data for the articles under review. These sources are bifurcated into databases, annual reports, reports published by international organisations such as International Monetary Fund, World Economic Forum, Transparency International, reports by Big 4’s such as Deloitte and PwC, and data extracted from published articles like Kaufmann et al. (2007). This classification will serve as an inventory of data sources for researchers in this field.

Table 8:

Data sources

Name of data source	Information available	Countries	Author/s
Amadeus - Bureau van Dyck databaseAmadeus and Bloomberg databases.	Ownership structure, Accounting and market data	European Union	Bonetti et al. (2016) Bajra & Cadez (2018)
Annual and quarterly North American Compustat database	Accounting and market data	Cross-Country	Elayan et al. (2016)
Annual reports	Audit timeliness (audit report signature date), Classification of financial restatements, Financial statements and corporate governance, Accounting data, audit committee data, auditor data, Firm characteristics, disclosures under IFRS, Accounting data, ownership data	Tunisia, Malaysia, India, Tunisia, Russia, China, Indonesia, Kuwait, East - Australia, Malaysia & Pakistan	Oussii & Taktak (2018), Wahab et al. (2014), Hundal (2016), Zgarni et al. (2016), Ahmed (2013), Wu et al. (2015), Krismiaji (2016), Alfraih (2016), Yasser et al. (2017a&b)
Bank of New York Mellon (2008)	Data on cross-listing	Cross-Country	Isidro & Raonic (2012)
Bankscope	Financial data	Cross-Country, MENA Region, China	Kanagaretnam et al. (2014), Abdelsalam et al. (2016), Wu et al. (2015)
Bloomberg database	Financial and market data	European Union, MENA region	Bajra & Cadez (2018), Abdelsalam et al. (2016)
BoardEx, Thomson One, LexisNexis	Additional information	European Union	Bonetti et al. (2016)
CCER China Stock Database	Ownership structure	China	Ye (2014)
China Centre for Economic Research	Data on privately owned enterprise	China	Chan et al. (2014)
China Stock (Securities) Market and Accounting Research Database	Financial data	China	Liu et al. (2017), Huang et al. (2016), Chan et al. (2014), Ye (2014)
Compustat global	Financial data for non-US firms, Accounting and market data	Cross-Country, European Union, Singapore, Malaysia	Hope et al. (2008), Bonetti et al. (2016), Han et al. (2012), Kusnadi et al. (2016), Wahab et al. (2014)
Compustat North America	Financial data for US firms	Cross-Country, European Union	Hope et al. (2008), Han et al. (2012)
Country variables from Kaufmann et al.(2007), the Federation of European Securities Exchange (2007), the World Bank (2008), the World Economic Forum (2007), and the World Federation of Exchanges (2008)	country variables	Cross-Country	Isidro & Raonic (2012)
Data Analysis, Retrieval & Transfer System (DART)	Firms business reports, audit reports, ICFR regulation data	Korea	An (2015), Oh et al. (2014)
Datastream	Financial data, financial restatements	Malaysia, MENA Region, Singapore and Malaysia	Johl et al. (2013), Wahab et al. (2014), Abdelsalam et al. (2016), Bradbury et al. (2006)
Deloite IAS Plus Website (2009)	Mandatory adoption of IFRS - country and year	Cross-Country	Houqe et al. (2012)
European Commission (2006) and PriceWaterhouseCoopers (2008)	Tax Rates	Cross-Country	Isidro & Raonic (2012)
I/B/E/S international database	Analyst forecast data, forecast dispersion, stock price and number of shares	Cross-Country, European Union	Isidro & Raonic (2012), Bonetti et al. (2016), Han et al. (2012)
IMF International Financial Statistics	Exchange rate data	Cross-Country	Hope et al. (2008)
International transparency	Corruption perception index	Cross-Country	Malagueno et al. (2010)
Kaufmann et al. (2007)	Freedom of press	Cross-Country	Houqe et al. (2012)
KIS VALUE II database	Foreign investors, audit information, financial and audit reports	Korea	Oh et al. (2014)
Korea Corporate Governance Service	Corporate governance data based on an annual survey to select well governed firms.	Korea	Kwon et al. (2014)
Korean Information Service (KIS) database	Stock data	Korea	An (2015)
Manual collection from annual reports	Accounting data, audit committee data, board of directors, Accounting data, governance mechanism, auditor, Audit hours and fees disclosed in annual reports filed with FSS (Securities Issuance and Disclosure Rules Section 72), Corporate governance, NAS data, institutional and governance variables, Auditor, shariah compliance, Board of Directors and Audit Committee, Board composition, ownership data, Audit Committee, Auditor identity	European Union, Iran, Jordan, Korea, Singapore and Malaysia, Hong Kong	Fung et al. (2013), Bonetti et al. (2016), Salehi & Shirazi (2016), Alzoubi (2016a&b, 2017), Johl et al. (2013), Wahab et al. (2014), Ismail et al. (2015), Kusnadi et al. (2016), Bradbury et al. (2006), Bajra & Cadez (2018)
Mint Global database from Bureau van Dijk	Financial data (missing)	Venezuela	Batta et al. (2014)
Official KSE website	Information of board of directors	Kuwait	Alfraih (2016)
OSIRIS	Financial data, Discretionary accruals	Korea, Malaysia, Cross-Country	An (2015), Mohammed et al. (2017), Houqe et al. (2012)
PACAP database	Firm level data	Hong Kong	Fung et al. (2013)
Taiwan Economic Journal database	Firms that have restated financial reports	Taiwan	Sue et al. (2013)
The Financial Times Banker databases	Financial data	MENA Region	Abdelsalam et al. (2016)
Thomas One Banker database	Financial data	Venezuela	Batta et al. (2014)
Thomson Financial One Banker database	Financial data	Malaysia	Ismail et al. (2015)
Thomson Reuters Zawya	Corporate governance and ownership data	MENA Region	Abdelsalam et al. (2016)
UBS Brunswicks Russian Equity Guides	Accounting data, corporate governance index	Russia	Ahmed (2013)
World Economic Forum	Perceived quality of accounting and auditing standards	Cross-Country	Malagueno et al. (2010)
World Economic Forum (2008)	Investor protection	Cross-Country	Houqe et al. (2012)
Worldscope and Datastream	Accounting and market data	Cross-Country	Isidro & Raonic (2012)

The majority of articles have used databases to extract data. These databases provide financial and market data for a single country as well as cross-country research. Thus, these articles fall under the category of archival research. The inclination towards archival research is increasing due to the availability of databases and advances in technology to use data retrieved from these databases (Oler et al., 2010). These databases provide data on accounting variables, stock prices, and CG. Another important and most widely used data source is the firm’s annual report extracted from a firm or stock exchange website, especially for countries such as Iran, Jordan, Korea, Singapore, Hong Kong, Tunisia and Kuwait. Accuracy is the key advantage of data collected from annual reports, but manual data collection is time-consuming.

Categorisation Analysis

The categorisation analysis discusses the articles used in review on the parameters such as focus/theme, theory, and related construct, jurisdiction, organisational focus, unit of analysis, the conceptualisation of FRQ, FRQ proxies, types of CG mechanisms, number of CG mechanisms, CG proxies, techniques of analysis, findings, robustness tests and use of the interaction term.

Focus (Theme) of the Articles

The focus of articles used in the review is categorised into five broad themes, namely, regulation, comparative analysis, country-specific, political connections, and religion. The theme of regulation includes regulations of CG and FR. The focus of articles under this theme is to examine the effectiveness of an existing regulation or newly formed regulation to improve CG and FRQ. Regulations related to CG include revision of CG code, attributes of good governance suggested by stock exchanges, director training programmes, the mandatory formation of the audit committee, presence of independent directors on the audit committee, the role of foreign strategic investors, the role of the auditor in Internal Control over Financial Reporting (ICFR) and provision of non-audit services by the external auditor. The regulations related to FR include mandatory adoption of IFRS, ICFR, and disclosure of audit hours and fees. The theme on comparative analysis compares the effect of voluntary or mandatory adoption of accounting standards and IFRS, the mandatory formation of the audit committee, investor protection regime, preparers’ incentives, culture and legal environment on FRQ among different countries as well as for the same country in different periods.

The country-specific theme includes factors/characteristics/events specific to a country/group of countries. For example, institutional ownership by mutual funds, the presence of accounting academicians on board and cash compensation to independent directors are specific to China. One country, two systems, is specific to Hong Kong, and ethnic differences like Bumiputera Malay are specific to Malaysia and other Southeast Asian countries. The theme of political connections is explored in relationship-based economies such as China, Malaysia and Venezuela. The theme of religion focuses on Shariah principles. The articles under this theme compare FRQ of Shariah and non-Shariah firms and examine the impact of Shariah board size on FRQ and FRQ of Islamic banks. The different themes identified give insight into the contexts that are and can be explored to examine CG’s role in improving FRQ.

Mapping of Theories with Constructs (Financial Reporting and Disclosure and CG Mechanisms)

Theories provide a foundation and frame of reference to investigate a research question. It also provides a basis to conceptualise constructs. Table 4 maps various theories used in the articles under review with FR and disclosure and CG mechanisms. FRQ and CG research draws on theories from disciplines such as financial economics, science, technology and society; ethics; sociology; law; organisational behaviour, accountancy, management studies, politics and philosophy. However, agency theory is the most dominant theoretical paradigm. It provides a basis for understanding and mitigating agency problems using FR and various CG mechanisms like the board of directors, audit committee and auditor.

Jurisdiction

The articles used in the review are divided into four categories based on the jurisdiction; single country, two-country, regional group and cross-country. The majority of articles (65%) examine a single country setting. In this setting, China and Malaysia are the most examined, with five articles each. Regional groups include the Middle East and North Africa (MENA) region, European Union, Gulf Cooperation Council and Asia-Pacific. Cross-country articles compare developed and emerging economies. Jurisdiction also helps in identifying the contexts that might be an exciting avenue of research. It also aids in understanding whether research is ostensive or performative. The purpose of ostensive research is to generalise, while performative research is to study practices within organisations. The articles under review are ostensive and attempt to generalise findings across organisations in a single country or cross-country setting. However, performative research can provide a fruitful avenue of research.

Organisational Focus

Organisational focus examines the type of organisation for articles used in the review. The type of organisation includes a non-financial listed firm and a financial firm (which includes listed banks, Islamic banks or local bank). The organisational focus of the majority of the articles (93%) is non-financial listed firms.⁵ It is evident, as FR is an essential component of the information environment of listed firms. Also, there is a standardisation of information across non-financial listed firms due to regulatory requirements. Thus, they provide a larger sample compared to highly regulated sectors such as banking, insurance and electricity. Also, FR requirements and regulations of regulated sectors are quite different from non-financial listed firms. Thus, both are not comparable. The articles with an organisational focus on banking (7%) also include Islamic banks (Abdelsalam et al., 2016; Kolsi & Grassa, 2017) and local banks in China (Wu et al., 2015). Emerging economies are giving due importance to governance and disclosure issues in the banking sector. Thus, research with an organisational focus on financial firms is a fruitful stream of research, from both an academic and policymaking perspective.

Unit of Analysis

The unit of analysis of articles under review are categorised into (a) non-financial firms, (b) country, (c) financial firm, (d) directors and auditors and (e) preparers, auditors, regulators and users. In the case of archival research (88%), the unit of analysis is country, financial and non-financial firms. In the case of experimental and survey research (12%), the unit of analysis is directors and auditors, preparers, regulators and users. These articles are perceptual.

Conceptualisation of FRQ

The conceptualisation of FRQ is essential as it is not directly observable and is perceived by different individuals differently. However, its conceptualisation is mostly missing in the literature (Gaynor et al., 2016). Thus, it is an essential aspect of categorisation analysis. Only 27% of the articles under review conceptualise FRQ; the rest directly use empirical proxies. Among the articles that conceptualise FRQ, there is no uniformity. The conceptualisation is based on different aspects such as ‘transparency, multidimensional approach’ (Lopes et al., 2016; Yasser & Mamum, 2016), ‘qualitative characteristics, true and fair view’ (Bajra & Cadez, 2018), ‘information asymmetry’ (Han et al., 2012), ‘conformity with accounting standards’ (Fettry, 2017), ‘auditors’ opinion’ (Chan et al., 2014), ‘value relevance’ (Fung et al., 2013; Huang et al., 2016) and ‘users’ demand and investor protection perspective’ (Salehi & Shirazi, 2016). Transparency is the extent to which accounting earnings reflect economic earnings (Ball et al., 2003; Liu et al., 2017). Qualitative characteristics include relevance and faithful representation (Denziana, 2015; Krismiaji et al., 2016). We also observe that the conceptualisation of FRQ is linked with audit quality such as Chan et al. (2014).

FRQ Proxies

Figure 9 shows the classification of FRQ proxies; Figure 10 shows the frequency of FRQ proxies used with author/s details. Table 5 describes the measurement of these proxies. The proxies used to measure FRQ are classified under broad categories such as earnings quality, disclosure quality, qualitative characteristics, composite measure, audit quality and proxies specific to the banking sector. Earnings quality can be captured through accounting measures, market measures and external indicators. Accounting measures assess quality using accruals and real earnings management, earnings persistence, earnings smoothness and target beating. Market measures examine investors’ response to accounting information using earnings response coefficient and value relevance of accounting information. External indicators of misstatements reveal the ex-post manifestation of the low FRQ in the form of financial restatements, disclosure of internal control weakness, errors in financial statements, fraud and modified audit opinions. Of these, accruals earnings management is the most widely used proxy of FRQ and is estimated using various empirical models.

Unlike earnings quality, disclosure quality is a broader measure of FRQ encompassing both accounting and non-accounting information. It captures the reliability, timeliness and extent of accounting and non-accounting information disclosed by the firm. It is measured through a self-constructed index or disclosure index constructed by Canadian Institute for Advanced Research (CIFAR) and stock exchanges. Qualitative characteristics that make FR information decision-useful are also used as a proxy of FRQ. It is captured using a self-constructed index. In some instances, proxies of audit quality (Big 4 and audit delay) are used as a proxy of FRQ. For example, Oussii and Taktak (2018), Malagueño et al. (2010) and Hope et al. (2008). In the case of banking firms, discretionary loan loss provision (LLP), future loan write-offs, probability of having a loss, large LLP and low capital are used to measure FRQ. The majority of the articles measure FRQ using one proxy. However, FRQ is a multidimensional concept, and a multidimensional approach should be used to measure it (Gaynor et al., 2016). Only six articles under review take this approach and use different types of accruals rather than different dimensions of FRQ.

Types of CG Mechanisms

The CG mechanisms examined in the articles used in the review are categorised into internal, external and country-level mechanisms. Internal mechanisms are internal to the firm and include ownership structure, the board of directors, audit committee, company code, and internal audit function. External mechanisms are external to the firm and include debt, external financing needs and external auditors. Country-level mechanisms deals with the strength of institutions to protect investors, their antecedents and consequences. It includes legal origin, investor protection, regulation, political connections, corruption, expropriation risk, religion and culture.

Number of CG Mechanisms

The majority of the articles (63%) examine only one mechanism of CG. Ownership structure, the board of directors and the audit committee are the most examined CG mechanisms. The examination of two or more CG mechanisms together aids in understanding the substitution and complementary effects between different CG mechanisms. 28% of the articles examine more than one mechanism, including a combination of mechanisms such as the board of directors, audit committee, audit quality, ownership structure, regulation, religion, political connections, internal auditor and legal environment. About 10% of the articles use a composite score, including firm-level, institutional, and country-level mechanisms to capture CG.

CG Proxies

Figures 11A –11E present the proxies related to the audit committee, board of directors, ownership structure, external auditor and internal audit function. It is observed that the accounting and financial expertise and independence of the audit committee is the most examined characteristic. At the same time, in the case of the board of directors, it is CEO duality. The measurement of the audit committee and board of directors’ characteristics are based on the number of members, percentage or dummy variable. In the case of ownership structure, the proxies are measured in percentage or dummy variables. Since different CG mechanisms substitute/complement each other, a composite measure/index is often used to capture different CG mechanisms together. The composite measure is also used to capture different dimensions of one CG mechanism—for example, internal audit function in experimental and survey research. Table 6 provides an overview of proxies and measurement used for other CG mechanisms such as regulations on firm-level governance and FR and disclosure, political connections, protection of minority shareholders, law enforcement, religion, culture, expropriation risk and corruption.

Methodology

The purpose of all the articles under review is to examine the effect of different CG mechanisms on FRQ. All these articles use regression analysis, except Goodwin and Seow (2002), based on experimental design. The majority of the articles use the ordinary least squares (OLS) method. Regression analysis such as logit, probit, splines, generalised least squares (GLS), generalised method of moments (GMM), partial least square, control sample, cross-sectional regression and piecewise linear regression is also used. Factor analysis and principal component analysis (PCA) are used when a composite measure of CG and FRQ is used. The primary purpose is to extract factors. Difference-in-difference method is used to study the differential effect of a treatment. For example, the mandatory adoption of IFRS (Bonetti et al., 2016) and ICFR (Oh et al., 2014). An important issue in the examination of the relationship between CG and FRQ is endogeneity. Few studies have used two stage least square (2SLS) and three stage least square (3SLS) methods to address endogeneity.

Findings

Table 7 summarises the findings of articles under review. It highlights which CG mechanisms are positively related, negatively related and not related to FRQ. However, certain findings are contradictory to the theory. AC meetings (Salehi & Shirazi, 2016), block holding (Kolsi & Grassa, 2017) and regulation (Bajra & Cadez, 2018) should impact FRQ positively, but it was negative. CEO duality (Mohammed et al., 2017), board busyness (Alfraih, 2016; Hundal, 2016), audit tenure (Alzoubi, 2018), non-audit fees (Wahab et al., 2014) and political connection (Batta et al., 2014) should have a negative relationship with FRQ. However, it was positive.

Robustness Tests

Robustness tests examine how regression coefficient estimates behave when the regression specification is modified. Articles have used alternative specification of the regression equation; alternative measurement of independent variables, dependent variables and control variables; subsample analysis; comparative analysis; interaction terms; additional tests; and additional controls as robustness tests. The robustness tests also include the instrumental variable approach to address the endogeneity issue.

Interaction Term

The interaction term is used to examine the combined effect of two CG mechanisms. It aids in understanding substitution or complementary effects between two mechanisms. A positive coefficient of interaction term indicates a complementary effect, and a negative coefficient indicates a substitution effect. In the substitution effect, strong monitoring by one mechanism mitigates the entrenchment effect of another mechanism. For example, mutual fund ownership in privately owned enterprises reduces the likelihood of modified audit opinions (Chan et al., 2014). Thus, strong monitoring by mutual fund ownership mitigates entrenchment by privately owned by firms. Similarly, Big N auditors are more strongly associated with higher disclosure transparency in code law countries (Han et al., 2012). Interaction between board quality and internal audit quality increases earnings management (Johl et al., 2013).

In the case of complementary effect, there is an alignment in monitoring by two mechanisms. For example, the audit committee induces firms with sound CG to maintain more conservatism in FR (Kwon et al., 2014). The interaction between Islamic banks and board independence has a positive impact on accounting quality (Abdelsalam et al., 2016). The interaction between ownership structure and securities law reduces earnings management (Fung et al., 2013). The interaction between audit committee characteristics and Company Law Directive 8 improves FRQ (Bajra & Cadez, 2018). Interaction between country-level monitoring mechanisms and firm-level monitoring by board improves FRQ around IFRS adoption (Bonetti et al., 2016). In the above articles, the complementary effect has a positive connotation, but it can also have a negative connotation. For example, Sue et al. (2013) found that family firms with the divergence between control and cash flow rights result in more significant agency conflicts and a higher likelihood of financial restatements.

The interaction term is also used to examine the impact of regulation on FRQ, given the CG practices at the firm and country levels. For example, IFRS adoption improves earnings quality in countries with strong investor protection (Houqe et al., 2012). It improves value relevance and faithful representation for firms with good board governance (Krismiaji et al., 2016). The interaction term is also used to examine the choice of CG mechanism by firms given the country-level institutions. For example, Hope et al. (2008) examined the effect of home country secrecy on auditor choice given the firm’s involvement in foreign operations. They found a negative effect on the likelihood of hiring a high-quality auditor for such firms. Interaction terms are also used to examine the role of political connections in improving FRQ. For example, accounting quality is better for politically connected firms with high expropriation risk (Batta et al., 2014). Also, firms with strong political connections are less likely to appoint high-quality auditors (Liu et al., 2017).

Scope for Future Research

In this section, we answer the third research question: What is the scope of future research in understanding the impact of CG on FRQ in emerging markets? To answer this question, we need to reflect on the volume of research in this area. The articles under review have examined the impact of different CG mechanisms at the firm and country levels on various aspects of FRQ in emerging markets. While discussing avenues for future research, it is essential to highlight that emerging markets provide a particular context with different institutional, legal, economic, political and social specificities. The interplay among all these specificities influences the role of CG in ensuring/improving FRQ in the emerging markets. In the light of continuous efforts to improve CG and FR to match the global standards and to attract foreign investors, these countries provide a fresh context to examine CG & FRQ. In addition to the contextual differences, other significant avenues for future research are research methodology, multitheoretical approach, bridging the gap between academia and practice and examining incentives of preparers of FR information. Thus, there are several avenues for future research in this area. We list the following based on our observations and analysis.

Methodology

Conceptualisation and Measurement of FRQ

The ‘Categorisation Analysis’ section highlights the conceptualisation and proxies of FRQ, as measured by articles used in this review. The conceptualisation and measurement of FRQ is the bedrock of research in this area and an important avenue of future research. However, the conceptualisation of FRQ is mostly missing in the literature. Few articles used in review and otherwise (Biddle et al., 2009; Dechow et al., 2010) have tried to conceptualise FRQ, but there is no consistency. An ideal basis for conceptualisation of FRQ is decision usefulness and the qualitative characteristics of decision-useful information (Jonas & Blanchet, 2000). Gaynor et al. (2016) conceptualises FRQ based on qualitative characteristics but do not derive empirical measure. Conceptualisation should lead to the operationalisation and measurement of FRQ. However, no article used in review derived empirical measure of FRQ based on conceptualisation. Accruals earnings management/discretionary accruals are used as a blanket proxy of FRQ. However, this proxy suffers from measurement error. Measurement error is cited as the main limitation by many articles used in the review. For example, Houqe et al. (2012), Yasser and Mamun (2015), Bajra and Cadez (2018), Kolsi and Grassa (2017), Alzoubi (2018), Johl et al. (2013) and Wahab et al. (2014) have mentioned it as a limitation. Moreover, total accruals capture the combined effect of all accounting choices. Examining the impact of specific accounting choices/standards on FRQ is also an important avenue of research.

In addition to discretion over accruals, discretion can be exercised on real activities. Thus, real earnings management is also a proxy of FRQ; for example, Bonetti et al. (2016). However, the use of real earnings management by financial firms and Islamic banks is not explored extensively. Thus, the use of real earnings management by Islamic banks with Murabaha, Mudaraba and Musharaka transactions is an important avenue of research. Apart from accounting measures, market measures (Bonetti et al., 2016; Huang et al., 2016; Lopes et al., 2016) and external indicators of misstatements (Goodwin & Seow, 2002; Sue et al., 2013; Wahab et al., 2014) are also used as FRQ proxies. Another aspect of FR is the disclosure of information other than financial statements. Only three articles used in review focus on disclosure quality. It is well accepted that FRQ is multidimensional, and hence multiple measures should be used to capture FRQ. If a researcher can achieve consistent results across multiple measures, it will increase confidence in the results.

Another important observation is that the proxies of audit quality and FRQ are used interchangeably. Examples include financial restatements (Wahab et al., 2014), Big 4 and audit delay (Hope et al., 2008; Malagueño et al., 2010; Oussii & Taktak, 2018). Though the two constructs are interrelated, the use of the same proxies for both downplays the distinction between the two. Future research can focus on deriving different measures for both. In some cases, specificities of the country restrict the use of specific proxies. For example, in Jordan, there is no disclosure about modified audit opinions and financial restatements (Alzoubi, 2018). Its audit market negates the separation of office-level versus firm-level effects (Alzoubi, 2016a).

Based on the above discussion, future studies can address the following questions:

How to conceptualise and measure FRQ based on the qualitative characteristics of decision-useful information?

How to deal with measurement error inherent in the earnings management models?

What is the impact of individual accounting choices on FRQ?

Whether there is a trade-off between earnings quality and disclosure quality?

How to construct a multidimensional measure of FRQ? What are the insights gained from using a multidimensional measure over a single measure?

How to distinguish between FRQ and audit quality proxies?

Measurement of CG

In the case of CG, there is no consistency in the measurement of CG mechanisms’ characteristics. For example, to capture board independence, the proportion of independent directors, a dummy variable for majority directors as independent, or a dummy variable for more than 50% independent directors is used. The data for CG is also manually collected and subsequently coded. Thus, there is a scope of measurement error. Moreover, in a few articles, a self-constructed index is used to capture CG, which is subjective. The majority of the articles focus on only one CG mechanism. The use of one mechanism can result in inconsistent coefficient estimates (Dechow et al., 2010) and omitted variables (Black et al., 2012). In such cases, PCA can be used (see Larcker et al., 2007 for detailed explanation). Therefore, future research can address the following questions:

Are the results robust to different measurements of one CG variable/dimension?

How to construct a robust composite measure of CG?

Longitudinal Research

The articles examining IFRS adoption (Houqe et al., 2012) or recently introduced regulations like the provision of non-audit services by external auditors (Wahab et al., 2014) have limited/small-time period. Longitudinal research, in this case, provides scope for research. It is worthwhile to address: What is the magnitude of the impact of change in CG practices on FRQ over a long period?

Research Techniques

The choice of appropriate research techniques ensures the robustness of results. We have observed that many control variables are used while examining the impact of CG on FRQ. The use of many control variables can lower the power of statistical tests. In this case, a different approach is necessary. For example, create a portfolio based on firm characteristics and run a regression on each portfolio. This approach will reduce the control variables related to firm characteristics. In case of a change in regulation, instead of using the OLS, techniques like difference-in-difference can be used.

Endogeneity

Endogeneity due to simultaneity and omitted variable bias is a significant concern in CG and FRQ research. For example, well-performed firms are more likely to have good CG practices and, thus, better FRQ. Thus, addressing the issue of endogeneity is essential to show that results are robust. The instrumental variable approach and Heckman’s two-stage estimation can be used for the same. Brown et al. (2011) provide a detailed explanation of dealing with endogeneity.

A Shift from Archival Research

The availability of databases for firms’ financial and market data and advances in technology to use this data have resulted in a large amount of archival research in accounting. This is true for developed as well as emerging markets. A shift from archival research to experimental, survey, or case study research can provide new insights into CG’s role in ensuring/improving FRQ, especially in emerging markets. Both survey and experimental research can provide a 360-degree assessment of stakeholders’ perceptions about accounting and auditing in emerging markets. This research can be extended further by examining the individual characteristics of the stakeholders. Such assessment is vital in emerging markets characterised by principal-principal conflict, presence of family members on board and its sub-committees, weak investor protection, and less developed audit market. Thus, it is worthwhile to explore the following questions in emerging markets:

What are the perceptions of directors/internal auditors/audit committee members/external auditors/employees associated with accounting for CG’s role in improving FRQ?

Whether their perceptions are different or similar?

How do individual characteristics such as personality, age, gender and religion affect their perceptions?

Multitheoretical Lens

The most dominant theoretical paradigm in this area of research is the agency theory. Thus, the protection of the interests of shareholders is the focal point of CG and FRQ. However, how CG and FRQ can help mitigate agency problems between shareholders and debtholders can be an interesting question to address, especially in emerging markets with weak creditor rights. Many emerging markets are initiating efforts to strengthen the protection of creditors. For example, India has introduced new Insolvency and Bankruptcy Code (2016) by replacing Sick Industrial Companies Act (1985). In addition to this, specific studies examining links between various participants in CG and FR using behavioural research, cognitive and group models, and interaction of informal and power relationships with formal processes also deserve attention. Examination of power relationships is particularly important in emerging markets because in such markets power is concentrated in the hands of promoters. Moreover, testing the boundary conditions of agency, stewardship, and organisational theories can be an exciting avenue of future research. Following questions can be proposed:

What is the role of CG in improving FRQ from the perspective of creditor rights protection in emerging markets?

What conclusions can be drawn about the role of CG in improving FRQ using theories other than agency theory?

Bridging the Gap Between Professional/Public Policy and Academia

The primary research question of many articles used in this review is to examine the effect of change in regulation/introduction of new regulation on FRQ and test the policy’s effectiveness. However, the reverse process, framing policy based on suggestions/insights from academic research, is not found. Besides, it is also essential to evaluate the social value of accounting academics by engaging with practitioners. There are many issues faced by the professional accountant/auditor and policymakers, which are mostly not addressed in the literature. For example, in an emerging market like India the audit market is concentrated with meagre competition. The Big 4 auditors audit 10% of the listed firms representing 75% of market capitalisation. Remaining listed firms are audited by small auditors. In such scenario, implementing regulation for mandatory audit rotation and cooling period in spirit becomes difficult. To address such issues, collaboration between academia and policymakers is vital.

Accounting Standards and Preparers’ Incentives

The accounting regime of a country determines the discretion allowed by the accounting standards to the preparers of accounting information. A principle-based regime allows more accounting discretion in comparison to a rule-based regime. The degree of discretion will influence the preparers’ incentives in making accounting choices and, thus, FRQ. However, preparers’ incentives have not received much attention while examining FRQ in emerging markets. Many emerging markets are converging with IFRS. Reporting incentives in emerging markets are weak in comparison to developed markets (Christensen et al., 2015). Thus, it is important to examine the following:

What dominates FRQ in emerging markets—accounting standards or preparers’ incentives?

Whether CG moderates/mediates the relationship between FRQ and preparers’ incentives in emerging markets?

Conclusion

In this study, we conducted an SLR using a detailed analytical framework to examine the volume of research examining CG’s role to ensure FRQ in emerging markets. We used descriptive analysis and categorisation analysis to answer three research questions. Descriptive analysis reveals that the majority of articles are published in accounting journals classified as ‘A’ and ‘C’ category. The most cited articles are from journals with high impact factor and ‘A*’ category. Categorisation analysis reveals five major themes examined by the articles used in the review: regulation, comparative analysis, specificities of country, political connections and religion. It is the manifestation of continuous efforts by emerging markets to strengthen investor protection regime and thereby bolster economic activity and financial development. All these themes are explored mainly for non-financial listed firms using archival research. The use of archival research is evident from the analysis of data sources used by articles. The categorisation analysis also includes measurement of CG and FRQ, mapping studies with different theories, methodology, findings and use of interaction terms. In the view of both descriptive and categorisation analysis, we explore avenues for future research and propose research questions for further examination in the context of emerging markets. This SLR contributes to academia and practice by providing insights about the existing research on the role of CG to ensure FRQ in emerging markets. First, it provides a comprehensive descriptive analysis of the general characteristics of articles in this area. Second, it synthesises the existing research using a detailed categorisation analysis based on a comprehensive review of themes researched, measurement of CG and FRQ, methodology, findings and interaction terms. Finally, it outlines the avenues for future research. To the best of our knowledge, this study is the first to take a detailed account of the role of CG to ensure FRQ in emerging markets.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

Notes

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Corporate Governance and Quality of Financial Reporting in Emerging Markets: A Structured Literature Review

Abstract

Keywords

Introduction

Methodology

Defining Research Questions

Search Strategy 1

Identification of Keywords

Database Search

Search Strings Used for Automatic Search in Databases.

Definition of Search Strings

Inclusion Criteria

Exclusion Criteria

Quality Assessment

Analytical Framework

Analytical Framework.

Data Extraction Form

Develop Insights and Critique Data Set

Results and Discussion

Data Sources.

Mapping Financial Reporting and Disclosure and Corporate Governance Mechanisms to Theories.

Measurement of FRQ.

CG Proxies.

Findings: Relationship Between CG and FRQ.

Descriptive Analysis

Distribution of Articles by Journals

Distribution of Articles by Year of Publication

Distribution of Articles by Publisher Database and Indexing

Distribution of Articles by ABDC Ranking

Article Impact

Distribution of Articles by Research Methods

Data Sources

Data sources

Categorisation Analysis

Focus (Theme) of the Articles

Mapping of Theories with Constructs (Financial Reporting and Disclosure and CG Mechanisms)

Jurisdiction

Organisational Focus

Unit of Analysis

Conceptualisation of FRQ

FRQ Proxies

Types of CG Mechanisms

Number of CG Mechanisms

CG Proxies

Methodology

Findings

Robustness Tests

Interaction Term

Scope for Future Research

Methodology

Conceptualisation and Measurement of FRQ

Measurement of CG

Longitudinal Research

Research Techniques

Endogeneity

A Shift from Archival Research

Multitheoretical Lens

Bridging the Gap Between Professional/Public Policy and Academia

Accounting Standards and Preparers’ Incentives

Conclusion

Footnotes

Declaration of Conflicting Interests

Funding

Notes

References

Search Strategy¹