Executive Compensation, Corporate Governance and Earnings Management in an Emerging Market

31 Pages Posted: 9 Nov 2016

See all articles by Muhammad Fayyaz Sheikh

Muhammad Fayyaz Sheikh

G.C. University

Syed Zulfiqar Ali Shah

International Islamic University; Mohammad Ali Jinnah University (MAJU)

Date Written: October 31, 2016

Abstract

We examine how compensation of chief executive officer (CEO) and corporate governance practices affect earnings management behavior in an emerging economy, Pakistan. Using 1836 firm-year observations from 260 firms listed in KSE for period 2005 to 2012, we do not find that CEO compensation has significant influence on earnings management behavior however weak evidence is found that CEOs in small firms do manage earnings to increase their compensation.

Further, we find that CEO duality is related to improved earnings quality. However, larger boards appear to be related to higher earnings. Thus, larger boards reduce the quality of reported financial information. Furthermore, we find that concentrated ownership is related to higher earnings management. Sub-sample analysis shows that both concentrated and family ownerships are related to income decreasing earnings management. Overall, as policy implications, our findings suggest that earnings management behavior is likely to be conditioned to the contextual settings of the economy under examination.

Keywords: Corporate governance, Corruption, Discretionary accruals, Earnings Management, Executive Compensation, Government effectiveness

JEL Classification: G30, G31, M40, M41

Suggested Citation

Sheikh, Muhammad Fayyaz and Ali Shah, Syed Zulfiqar, Executive Compensation, Corporate Governance and Earnings Management in an Emerging Market (October 31, 2016). Available at SSRN: https://ssrn.com/abstract=2865726 or http://dx.doi.org/10.2139/ssrn.2865726

Muhammad Fayyaz Sheikh (Contact Author)

G.C. University ( email )

Alama Iqbal Road
Faisalabad, Punjab
Pakistan

Syed Zulfiqar Ali Shah

International Islamic University ( email )

PO Box 1243
Sector H-10
Islamabad, Kpk 44000
Pakistan

Mohammad Ali Jinnah University (MAJU) ( email )

74 E
Blue Area, Jinnah Avenue
Islamabad, Punjab 46000
Pakistan

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