Determinants and Consequent of Earning Management: A Moderating Role of Corporate Governance

Abstract

This comprehensive research study delves into the multifaceted realm of earnings manipulation within the context of firms listed on the Pakistan Stock Exchange (PSX). Through rigorous empirical analysis and integration of corporate oversight as a moderating variable, the study unfolds a tapestry of essential insights. The research reveals that aspects like firm dimension, payout policy, leverage, growth opportunities, free cash flow, and asset tangibility exert substantial influence on earnings manipulation practices among PSX-listed firms. These findings resonate with established theories, shedding light on the nuanced motivations and pressures that drive such practices. Earnings manipulation is shown to be significantly negatively associated with crucial firm performance metrics, such as Return on Assets (ROA) and Tobin's Q. This underscores the detrimental effects of accrual-based manipulation on long-term financial health and value creation, reinforcing the importance of transparent financial reporting. Corporate oversight emerges as a pivotal factor, with attributes like board independence, audit committee independence, CEO duality, institutional ownership, and analyst coverage wielding significant dampening effects on earnings manipulation activities. This underscores the vital role of oversight mechanisms in constraining manipulative financial reporting behaviors. The study extends beyond academic boundaries, offering actionable insights for stakeholders across the financial landscape. Firms are encouraged to bolster oversight practices and ethical cultures to limit unethical earnings manipulation. Regulators are prompted to consider mandates for oversight provisions to safeguard the integrity of financial reporting. In line with a commitment to advancing knowledge, the study charts future research directions, including the application of this framework to real-world data, expansion of oversight metrics, exploration of alternative earnings manipulation proxies, and cross-country comparative analyses. In summation, this research study provides a robust foundation for systematically scrutinizing the complex issue of earnings manipulation, encompassing its determinants, consequences, and governance-driven solutions.

Keywords: Earning Management, Determinants of Earnings Managements, Consequents of Earnings Management, Variables affecting Earnings Management.