Corporate Governance and Earnings Management: Evidence from Listed Companies in Pakistan

Abstract

This article reviews published archival evidence on the relationship between corporate governance and earnings management in companies listed in Pakistan. It does not estimate a new regression. It compares studies of the Karachi Stock Exchange and the Pakistan Stock Exchange that measure earnings management with discretionary accruals or real activity models and relate those measures to board, audit committee, and ownership variables. Board independence and financial expertise are the devices most consistently associated with lower discretionary accruals around the 2012 and 2017 governance codes, although that restraint is weaker in family companies. Board size does not restrain manipulation. Duality of the chief executive and the chair is positively associated with earnings management in some earlier evidence. Audit committee independence constrains accruals in studies of 2003 to 2012, yet the audit clauses of the 2017 code raised formal independence and expertise without producing the hypothesized restraint. Director and family shareholding is linked to higher discretionary accruals, while institutional ownership does not point in one direction. Affiliation with a family business group coincides with lower earnings management without removing the conflict between controlling owners and minority shareholders. Across these studies, earnings management in listed Pakistani companies is predominantly opportunistic.