Application of Principal Component Analysis on the Relationship between Firms Financial Performance, Corporate Governance, and Accounting Frauds in PSX

Abstract

This study examined the impact of principal component analysis on the relationship between firm financial performance, corporate governance multiples, and accounting frauds of Pakistan listed firms. Effective corporate governance reduces information irregularity through better quality of accounting and financial reporting. This method also helps to reduce the information risk between management and directors this research investigates the mediating role of corporate governance and earnings multiples. For this purpose, we use the balanced panel data of 181 non-financial listed firms from 2014 to 2019. Our framework of analysis is based on the agency theories. The study examined two aspects of corporate governance multiples, the first is a board of director (board of director size and board of director meeting), the second is an audit committee (audit committee size and audit committee meeting). Whereas in this study firm financial performance are measured through both accounting-based measure (Return on assets- ROA, and Return on equity-ROE) and Market based measure (Earning per share- EPS). Further, we use multidimensional techniques is also known as Principal component analysis (PCA) and principal component regression (PCR) analysis. The PCA is the process of converting many factors into a single factor, which can represent the whole date. In this study we use selected earnings multiples variables after applying the PCA method we get one attributes that is not correlated with other variables and represents whole data. Subsequently, we use the principal component regression analysis method to investigate the results through the fixed effect model and the random-effects model. The PCRA results reveal that the first components can explain 48% variance of the variables, by applying the PCR method on GLS regression models the results reveal that some corporate governance multiple show resistance toward Accounting Frauds and enhance the financial performance of the firms. These results support the monitoring role of corporate governance multiples. While some attributes illustrated an insignificant relationship between CG multiples and firm financial performance is mediating by Accounting frauds. Therefore, our empirical finding suggests that good corporate governance improves the firm financial performance and reduces agency cost. This study helps investors and many other stakeholders.