Intan Waheedah Othman, Nur Aida Amir, Maslinawati Mohamad, Eley Suzana Kasim
This study aims to empirically examine the effects of financial factors and corporate governance on the likelihood of equity overvaluation among the Malaysian public listed firms. Specifically, it explores the strategic roles of two common earnings management attributes of discretionary Accruals-Based Earnings Management (AEM) and Real Earnings Management (REM), and corporate governance elements of the board that include board independence and board size in determining the likelihood of firms’ equity overvaluation. The analysis was performed on 163 firm-year observations from the FTSE100 sample companies from 2016 to 2018. The univariate (Pearson correlation) and multivariate (logistic regression) statistical techniques were employed to test the hypotheses. Results show that firms are less likely to engage in REM in attaining equity overvaluation. Moreover, no evidence was found to support that firms engage in AEM practices in ensuring that firms are overvalued. Interestingly, board size is an important mechanism in mitigating the likelihood of equity overvaluation. The domination of a large synergetic pool of people with the necessary skills and expertise on the board makes the board independence attribute irrelevant in controlling firm’s overvaluation. Whilst the findings from this study provide useful insights to the regulators for enhancing the corporate governance regulation, it further creates awareness among investors in identifying firms that are at risk of being overvalued.