Corporate governance and the prevalence of earnings management: evidence from India

Purpose To examine whether, and the extent to which, corporate governance impacts earnings management in India. Design/methodology/approach The study utilises an unbalanced panel of 3,271 listed non-finance companies in India spanning 2010–2022. A comprehensive corporate governance index (CGI), encompassing 21 attributes, has been constructed and further categorised into substantive alignment and structural oversight dimensions. Fixed-effects regression with robust standard errors and instrumental variable (IV-2SLS) techniques have been employed. Findings The CGI exhibits a significant positive association with AEM, suggesting that structural dimensions often act as a legitimacy shield, thereby allowing firms to establish regulatory credibility while navigating accounting grey areas. Conversely, substantive alignment mechanisms – specifically, auditor quality and insider ownership – significantly constrain manipulation. The moderating role of market concentration is largely insignificant; however, endogeneity-corrected models suggest a weakening of the legitimacy shield in highly concentrated markets for AEM. Research limitations/implications The significant positive CGI-AEM link and insignificant association with REM highlight the ineffectiveness of current frameworks. These findings necessitate a regulatory shift from structural “box-ticking” mandates toward substantive oversight and enforcement quality to prevent governance from serving as a mere facade for procedural legitimacy. Originality/value The study challenges the Agency Theory by demonstrating how “symbolic decoupling” in emerging markets allows governance to serve as a facade for compliance.