Corporate governance, earnings management and the value-relevance of accounting information: Evidence from Pakistan

Waqas Bin Khidmat (), Man Wang and Sadia Awan
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Waqas Bin Khidmat: Dongbei University of Finance and Economics, School of Accounting, Dalian, P. R. China
Man Wang: Dongbei University of Finance and Economics, School of Accounting, Internal Control, Research Center in China, Dalian, P. R. China
Sadia Awan: Department of Banking and Finance, G.C. University, Faisalabad, Pakistan

International Journal of Financial Engineering (IJFE), 2018, vol. 05, issue 03, 1-31

Abstract: This paper examines the effect of corporate governance and earnings management on the value relevance of accounting information. Using data collected from the annual reports of non-financial companies listed in Pakistan Stock Exchange, it is concluded that earnings and book value are value relevant. The value relevance of earnings decreases while the value relevance of book value increases for the firms engaged in the earnings management. On the contrary, good corporate governance practices have a positive impact on the value relevance of earnings as well as the book value. Firm-specific characteristics enhance the predictive power of the model by more than 14%. A robustness test was carried out for alternative measures of earnings management. For this purpose, first performance-matched discretionary accruals were calculated following Kothari et al. (2005). Second, short-term accruals (DeChow, 1994), long-term accruals (Teoh et al., 1998b) and total accruals (Whelan, 2004), are calculated to analyze the effect on the value relevance of earnings and book value. The results support our null hypothesis.

Keywords: Value relevance; earnings management; corporate governance; accounting information (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/S2424786318500251

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