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Nexus between corporate governance and earnings management in family and non-family firms

Author

Listed:
  • Aziza Naz

    (Bahauddin Zakariya University)

  • Monika Nadova Kroslakova

    (University of Economics in Bratislava)

  • Iqra Farheen

    (The Islamia University of Bahawalpur)

  • Marian Cvirik

    (University of Economics in Bratislava)

  • Anna Michalkova

    (University of Economics in Bratislava)

Abstract

This study explores the relationship between internal corporate governance mechanism and accruals and real earnings management (EM), following Pakistan’s 2012 amended Code of Corporate Governance. It also examines the moderating role of family firms on the relationship among corporate governance mechanisms and accruals and real earnings management. For this purpose, we used a sample of 172 firms listed on the Pakistan Stock Exchange (PSX) for 2012–2019. The dependent variables were estimated by utilizing the generalized method of moments (GMM), fixed random effects and moderation analysis were estimated through Stata. Hausman specification test was used to choose among random and fixed effects. Results report that board size showed a significant positive impact on abnormal discretionary expenses and overall real earnings management. Board independence led to a substantial and negative impact with accruals EM. Managers of family-owned firms are also opportunistically altering the reported earnings. Results illustrate to the users of financial statements that the reliability of financial information depends on the effectiveness of corporate governance. Also, highlight the efficiency of monitory mechanisms and suggest that board independence is one of the practical approaches for an emerging market to restrain the EM practices. Findings are helpful for regulators, policymakers, and investors to regulate and make policies to improve the financial reporting quality in Pakistan. As per the authors’ knowledge, this study adds the novelty by focusing on two critical internal monitoring mechanisms (board independence and board size) in mitigating earnings management, following the 2012 amended Code of Corporate Governance in Pakistan. It will add uniqueness by studying the moderating role of family ownership, as the literature is scarce. The findings of this study highlighted the impact of the internal monitoring mechanisms on earning management practices in Pakistan.

Suggested Citation

  • Aziza Naz & Monika Nadova Kroslakova & Iqra Farheen & Marian Cvirik & Anna Michalkova, 2023. "Nexus between corporate governance and earnings management in family and non-family firms," E&M Economics and Management, Technical University of Liberec, Faculty of Economics, vol. 26(2), pages 42-57, June.
    • Handle: RePEc:bbl:journl:v:26:y:2023:i:2:p:42-57
    DOI: 10.15240/tul/001/2023-2-003
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    References listed on IDEAS

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    More about this item

    Keywords

    Accruals earnings management; board independence; corporate governance code; dynamic panel data; family ownership; real earnings management; Pakistan;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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