Severe political and economic instability greatly impact the effectiveness of corporate governance (CG) mechanisms and ownership structure (OS). This study extends prior CG and EM literature by examining whether political instability moderates the relationship between CG effectiveness and EM practices. In addition, few studies have dealt with the issues of CG and EM in Palestine. Hence, the purpose of this study is to introduce empirical evidence from Palestine by examining the relationship between CG mechanisms and EM practices. The current study focuses, first, on investigating the relationship between the internal CG mechanisms related to the board of director's (BOD) characteristics, the audit committee (AC) characteristics, ownership structure (OS), and EM practices. Second, this study examines whether BOD and AC quality influence EM practice by using an aggregate measure. Third, this study investigates whether political instability affected the association of BOD quality and AC quality with EM. The study uses a panel data approach to examine a total sample of 29 non-financial companies listed on the Palestine Exchange (PEX) for 8 years from 2011 to 2018. The data of CG were collected manually from the published annual reports on the website of PEX. Moreover, the DataStream from Thompson Reuters is used to collect some of the financial data related to EM calculations. Using a Pooled OLS regression of panel data, the findings show that BOD independence, BOD nationality diversity, BOD meetings, the existence of remunerations and governance committee, and institutional ownership are negatively and significantly associated with EM. Foreign ownership is associated positively and significantly with EM practices. Furthermore, the findings reveal that AC characteristics, BOD size, CEO duality, and ownership concentration are not significantly associated with EM practices. The random-effects panel data model reveals inconclusive results in the Palestinian setting; the results show that the quality of BOD is positively associated with EM, which is unlike the agency theory perspective, while the quality of AC is associated negatively with EM, which is in line with agency theory. The results indicate that political instability increases EM practices in Palestine. Based on the regression analysis, the findings indicate that the relationship between the quality of BOD is stronger in reducing EM practices under political instability effects. In contrast, the quality of AC becomes weak under a situation of political instability. This research extends the existing literature by providing a unique contribution to CG and EM literature by filling this gap by examining this relationship between CG mechanisms and EM due to limited studies that have been conducted in Palestine. Moreover, the results can be generalized to other developing countries with political instability like Palestine, such as Arab Spring countries.

The purpose of this paper is to investigate the role of political instability in the context of the association between board of directors (BOD) and audit committee (AC) quality as indicators of corporate governance effectiveness and earnings management (EM). The non-financial listed companies on the Palestine Exchange (PEX) between the period from 2011 to 2018 were the samples of the study. Based on the OLS regression results by using a panel data of 232 observations, the findings show that the BOD quality is positively related to EM, while AC quality is negatively associated with EM. The results also reveal that political instability plays a moderating role by weakening the relationship between the AC quality and EM during the severe unstable political situation, while the BOD quality is negatively associated with EM under the same situation. This finding implies that the BODs might substitute ACs under severe political instabilities to protect the stockholders and stakeholders’ interests. Unlike most previous studies, this article addresses political instability as a moderating variable for the relationship between the BOD and AC quality as a composite measure of EM in the most emerging and smallest stock market in the region. The results of this work may assist the regulatory bodies, policymakers, and practitioners in revising the corporate governance code to promote the efficiency of the BOD and AC monitoring functions for the purpose to improve the faithfulness and reliability of financial reports and also to deter the management from engaging in critical levels of EM.

Allah forbade financial fraud in verse 29 in Al-Nisa’a Surah. This verse considered as evidence to constrain managers in engaging in earnings management (EM) and a command to mitigate the conflict between owners themselves to prevent EM. The objective of this paper is to investigate the role of political instability on the relationship between ownership structure (OS) and EM in the Palestinian context. By revering the prior literatures, the political circumstances influence the formation of OS. Agency theory and political theory were used to develop the hypotheses. Accordingly, it can be observed that OS and EM practices affected by political instability particularly in Palestine. Unlike most of the previous literatures on the developing countries, this study uses the political instability as a moderating variable to investigate the relationship between OS and EM in Palestine which is characterized by high level of political instability.