DO EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE PRACTICES EXPLAIN EARNINGS MANAGEMENT?

Muhammad Fayyaz SHEIKH¹
Aamir INAM BHUTTA¹*
Syed Zulfiqar ALI SHAH²
Jahanzaib SULTAN¹

ABSTRACT

The purpose of this study is to examine whether earnings management is influenced by executive compensation, concentrated/family ownership, or board structure in an emerging market. The study used an unbalanced panel data from non-financial firms listed at Pakistan Stock Exchange (PSX) and employed multiple regression with robust econometric estimation procedures. The study found that CEO compensation does not influence earnings management. Ownership concentration leads to higher earnings management while CEO duality reduces earnings management. In addition, family and concentrated ownership is mainly related to the downward earnings management. Furthermore, the study found that the larger boards lead to higher earnings management while the number of non-executive directors has no impact on earnings management. The study extended the limited research on the relationships between executive compensation, corporate governance and earnings management in Asian context. This study reported an emerging market where stock-based compensation does not exist, and CEOs do not engage in earnings management to increase their compensation. Furthermore, this study posed some challenges to existing studies by showing that ownership concentration, board size and CEO duality do have influences on earnings management in Pakistan.

Keywords: Corporate governance, Discretionary accruals, Earnings Management, Executive Compensation, Family Firms, Ownership Concentration

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