Corporate Governance Mechanism, Earning Management and Firm Financial Performance: Examining the Mediating Impact on Pakistani Listed Companies

Abstract

The existing literature concerning governance relationship is inconclusive as it assumes that the association is direct. A theoretical argument suggests that the effective corporate governance reduces the information asymmetry through better financial reporting quality. This serves as a tool to reduce this information risk. Following the argument, this study is an attempt to investigate the mediating role of earnings quality, a measure of financial reporting quality, in governance-value association. For estimation, panel data of 132 non-financial listed firms in Pakistan for the period 2012-2017 is considered and GLS Random effect model is used for regression, as suggested by Biørn (2004). Firm financial performance is measured through Return on Assets and Return on Equity. The findings of the study show that some attributes of corporate governance effectively resist the earnings management and enhances the value of firm, which approves the monitoring role of corporate governance mechanism. On the hand side, some CG attributes show insignificant results as well with ROA and ROE being dependent variable. It is concluded that corporate governance improves the value of the firm directly. The findings may be of interest to the academic researchers, practitioners and regulators who are interested in discovering the quality of corporate governance practices in Pakistani context and want to fulfil the CG guidelines to better perform in the industry . The findings also provide the Pakistani business community insights concerning the quality of corporate governance and corporate reporting. Also, this research helps to inform regulators about the benefits of disclosure of more transparent information to stakeholders and to the firm.