Analytical Procedures

This section discusses the process the researcher undergoes to analyse the data.

5.7.1 The Processes of Secondary Data Analysis (Quantitative Methods)

At this stage, we analyse the secondary data by using T-Tests (comparing means) and discriminant analysis rather than OLS and GLS regressions based on several reasons: (1) the

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analysis of the covariance matrices show no clear relationship between our variables, when the earnings management (dependent) variable was treated as continuous rather than categorical (2) the existence of multicollinearity and heteroskedasticity problems among the variables (see appendix 4), (3) the lack of statistical significance in the GLS results (see appendix 4), and (4) the fact that our sample size is small for this kind of technique (see Tables 5.7 and 5.8).

5.7.1.1T-Test (Comparing Means)

Here, we use the t-tests (comparing means) to investigate the relationship between our dependent and explanatory variables. We made the comparisons between the variables based on the three categories of earnings management we observed (high negative EM, low EM and high positive EM). Since we found a significant proportion of the EM observations are clustered around zero value which implies low earnings management, a group the firms display high positive earnings management, and a group of the firms display high negative earnings management (see appendix 3). In fact, 25% of the observations were found in each of the high EM categories, and 50% of them were in the near-zero category. T-tests were conducted for each of the corporate governance variables to test whether the means for each variable were significantly different for the group of firms belonging to each EM category.

5.7.1.2Quadratic Discriminant Analysis (Multivariate Analyses)

Since the OLS/GLS regressions were poorly specified and yielded weak results, in this section, we used quadratic discriminant analysis to predict which of the three EM categories each firm belonged to, on the basis of their corporate governance characteristics. This technique is computationally equivalent to regression analysis (Bramhandkar, 2011) to predict the relationship between corporate governance mechanisms and earnings management level in our sample firms. Linear discriminant analysis (LDA) and quadratic discriminant analysis (QDA) are the main two types that are available in discriminant analysis (Smith, 1947). This research used the QDA type since the relationships are not linear and this is also one of the main reasons for the misspecification of the regression models (see section 6.5.2).

The quadratic discriminant analysis was used in different ways to analyse the research variables: first, we analysed all the variables together based on the three categories of EM (to

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High +ve EM, Low EM, and High –ve EM) and the three different accruals models (Jones, Modified Jones and PPY); second, based on the first results, we found that the Modified Jones EM estimates produced more significant QDA results, therefore used the MJ earnings estimates to separately analyse corporate governance factors (board characteristics, audit committee characteristics, external audit and ownership structure) in order to discover which corporate governance factors were the best in identifying high positive, low or high-negative earnings management.

Finally, the sample size of the research that utilised QDA to explain the relationship between two or more variables should include five observations for each variable; the small sample size is not considered problematic in QDA (Lu, Plataniotis and Venetsanopoulos, 2003).

5.7.2 Interviews Analysis

The next stage is to use the interview approach to produce in-depth information on the processes of internal control and corporate governance mechanisms, and their relationship with earnings management practices. The semi-structured interviews conducted with managers, the findings from the models of accruals, the firms’ published financial statements, reviewing of published Amman stock market information, reviewing corporate governance statements in each firm and review of internal documentation provided as a result of the interviews. In order to refine the interview questions, one pilot interview was conducted with a well-qualified financial manager with a great deal of experience. Based on the results from this pilot study and advice from three academic professors at Jordanian universities experienced in research on corporate governance and earnings management, these final interview questions are refined to make more relevant to our research objectives.

The interviews are recorded using audio-tape and subsequently transcribed. After consultation, the managers of 11 firms agreed to be recorded as long as there is no obligation to answer any question, especially those which may have implications on their positions in the firms. Due to the sensitivity of the subject matter (earnings management) we have made the firms anonymous throughout this thesis. Only one manager was unwilling for it to be recorded due to the firm's policy. Each semi-structured interview lasts between one and two- and-a-quarter hours.

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The technique of dividing EM into categories is used first time in such topic, as most existing literatures tend to combine both high positive or high negative and analysed them together (Alghamdi, 2012; Rhohaida, 2011; Habbash, 2010).

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The interviews provide in-depth information which might be of assistance to financial statement users (e.g. suppliers, the government and investors) in understanding how internal control components and corporate governance mechanisms affect earnings management.

The interviews are used to explore several in-depth issues (see section 7.1). The resulting research instrument and an outline list of suggested questions used during the interviews are attached in appendixes 1 and 2.

5.8Summary

This chapter begins by discussing research methodology and paradigms. The analysis supports the decision that this research should adopt a mixed methodology. We adopt this methodology to help with understanding the nature of the relationships among internal control, corporate governance mechanisms and earnings management practices and the empirical results draw on data deriving from both quantitative and qualitative research methods.

Combination of the results of quantitative methods and qualitative methods has been discussed by various researchers who believe that this combination can lead to one of these three possibilities; (1) they can complement each other; (2) they can challenge each other, or (3) they talk past each other (e.g. Brown et al 2007). In chapter seven, we discuss these three possibilities in relation to our own results and the contribution to new knowledge this research makes.

This chapter also discusses the use of variables, their proxies and measurements, in the quantitative analysis. Additionally, this chapter discusses the procedures for both methods (secondary data and interviews).

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