CORPORATE GOVERNANCE, FINANCIAL REPORTING QUALITY AND FINANCIAL DISTRESS: EVIDENCE FROM PAKISTAN

Abstract

This thesis investigates the impact of corporate governance attributes (ownership structure and board structure) on financial reporting quality and financial distress among listed firms of Pakistan. The financial reporting quality is measured through accrual earnings management (AEM) and real earnings management (REM) while, financial distress is measured through Altman Z-score. The thesis also examines the impact of corporate governance on financial reporting quality with respect to the financial status of the firms. In addition, it examines which earnings management technique firms employ with respect to their financial health. The thesis investigates whether firms in Pakistan employ earnings management techniques as substitute or complement also whether earnings management is efficient or opportunistic. For econometric analysis the study utilizes a feasible generalized least square (FGLS), 2SLS and Panel logistic regression (PLR) techniques to test a sample of 150 non-financial firms listed on the stock exchange of Pakistan over the period of 2008-2017. Regarding the ownership structure the results of the thesis show that managerial ownership and Institutional ownership are negatively associated with earnings management and financial distress which act as a strong controlling mechanism thus enhancing the financial reporting quality. On the other hand family ownership and state ownership are positively associated with earnings management and financial distress. Board size and CEO duality are negatively associated with earnings management and financial distress, while board independence is positively associated with REM and financial distress, whereas, audit committee independence is positively associated with REM and financial distress. The results further reveal that managerial ownership is negatively associated with AEM irrespective of the firm’s financial position, whereas, institutional ownership, family ownership and state ownership firms are positively associated with REM when in healthier financial position. The impact of board size and CEO duality on earnings management varies with the financial status of the firm, whereas, board independence is positively associated with earnings management regardless of the financial status of the firm. Further, firms facing financial distress situation report higher discretionary accruals compared to REM. The results of the analysis indicate that there is a negative and significant relationship between AEM and REM, suggesting that Pakistani listed firms employ AEM and REM as a substitute to achieve earnings target. As expected, the result suggests that earnings management in Pakistan is tend towards opportunistic earnings management rather than efficient. Keywords: Ownership structure, board structure, financial reporting quality, financial distress. JEL Classification: G3, G32, G34, M41