The Effectiveness of Corporate Governance in Constraining Earnings Management in Pakistan

Aysha S. Latif () and Fahad Abdullah ()
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Aysha S. Latif: Lecturer, University of Peshawar.
Fahad Abdullah: Assistant professor, Institute of Management Sciences, Peshawar.

Lahore Journal of Economics, 2015, vol. 20, issue 1, 135-155

Abstract: Although firms’ annual reports are supposed to provide an unbiased and accurate picture of their financial position, managers may be induced to engage in earnings management in order to circumvent expectations. Such incentives can take the shape of stock prices, management incentives, or debt covenants. The purpose of this study is to investigate the effectiveness of three attributes of corporate governance in constraining earnings management practices. These include board characteristics, audit committee characteristics, and ownership structure. Based on a sample of 120 nonfinancial firms listed on the Karachi Stock Exchange during 2003–12, we find that audit committee independence is negatively associated with earnings management, while CEO duality and institutional shareholding is positively associated with earnings management. Moreover, the effectiveness of governance mechanisms in constraining earnings management practices differs across high- and low-growth firms.

Keywords: Earnings management; financial statements; corporate governance; board characteristics; audit committee characteristics; ownership structure; Pakistan. (search for similar items in EconPapers)
JEL-codes: G34 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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