Does Corporate Governance and Earning Quality Mitigate Idiosyncratic Risk? Evidence from an Emerging Economy

Habib Ur Rahman, Asif Ali, Adam Arian and John Sands ()
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Habib Ur Rahman: Faculty of Higher Education (Accounting and Finance), Holmes Institute, Gold Coast, QLD 4217, Australia
Asif Ali: School of Economics and Management, Xidian University, Xi’an 710071, China
Adam Arian: Faculty of Law and Business, Peter Faber Business School, Australian Catholic University, Brisbane, QLD 4014, Australia
John Sands: School of Business, Faculty of Business, Education, Law and Arts, University of Southern Queensland, Darling Heights, QLD 4350, Australia

JRFM, 2024, vol. 17, issue 8, 1-15

Abstract: This study investigates evolving corporate governance mechanisms within the context of an emerging economy. Addressing a literature gap, this study analyses the influence of corporate governance and earnings quality on idiosyncratic risk in an emerging economy. In particular, this research explores the impact of corporate governance practices and earnings quality on idiosyncratic risk. For this purpose, this research utilises a sample of 75 non-financial firms listed on the Pakistani equity market over nine years from 2010 to 2018. Employing the generalised method of moments, the findings of our empirical analysis reveal that firms with robust governance mechanisms and higher earnings quality experience minimal idiosyncratic risk. These outcomes provide valuable insights for standard setters, regulatory authorities, policymakers, and other stakeholders, emphasising the importance of governance mechanisms and earnings management in mitigating idiosyncratic return volatility.

Keywords: idiosyncratic risk; accrual quality; earnings quality; corporate governance; board quality index (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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