role of corporate governance in implementing ifrs in listed companies of pakistan

8/13/2019 Role of Corporate Governance in Implementing IFRS in Listed Companies of Pakistan

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ROLE OF CORPORATE GOVERNANCE

IN IMPLEMENTING IFRS IN LISTEDCOMPANIES OF PAKISTAN

In the partial Fulfillment for the Degree of

BS (Hons)

LAHORE SCHOOL OF ACCOUNTANCY & FINANCE

THE UNIVERSITY OF LAHORE(2013)


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The University of Lahore

Lahore School of Accountancy & Finance

Supervisory Committee

We the Supervisory Committee, certify that the contents and the form of

thesis submitted by ( ) have been found satisfactory andrecommend it for the evaluation of the External Examiner for the award of

degree of BS (Hons) (Discipline).

Supervisor

Co-Supervisor

Member


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Examination Committee

The Thesis viva of _____________ was held on ----------------------------- atthe Lahore School of Accountancy & Finance, The University of Lahore.

The Supervisory and Examination Committee gave satisfactory remarks onthe thesis and viva and were approved for the award of the degree of BS

(Hons) (Discipline).

_______________ ______________

External Examiner Internal Examiner


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Undertaking

I ___________, Registration No: _____________ declare that the contents

of my thesis entitled Role of Corporate Governance in Implementing IFRS

on Listed Companies of Pakistan are based on my own research findings

and have not been taken from any other work expect the references and has

not been published before.

I also undertake that I will be responsible for any plagerization in this thesis.

Students Name


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Plagiarism evaluation report

This is to certify that I have examined the Turnitin report of the thesis

entitled Role of Corporate Governance in Implementing IFRS on Listed

Companies of Pakistan.

The thesis contains no text that can be regarded as plagiarism.

The overall similarity index obtained from the Turnitin software is ___%.

Supervisor


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Dedication

To Whom the World Owes its Existence Hazrat Muhammad (P.B.U.H)


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Acknowledgement

First of all I like to thank to my GOD who has complete knowledge and guide me

in every field of life and enabled me to complete my theses. I like to pay respect to the

university which has provided me with such opportunity to be a part of this institution. I

am heartily thankful to me supervisor _____________________whose encouragement,

guidance and support from the beginning to the final level help me to develop an

understanding of the subject. Thanks to all Thesis Committee who taught me that how to

design my theses. They inspired me and support me throughout the work.

I am greatly thankful to my family: my parents who supported me throughout my life.

Also special thank to my friends for their support and help in completing this theses.

Lastly, I prefer my regards and blessings to all of those who supported me in any respect

during the completion of the project.


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Abstract

This paper investigates that there is a relationship among the corporate

governance mechanism and the earning quality of the company. The aim of the research

was to find out the relation of corporate governance mechanisms like, board size, board

independence, gender diversity on the board, absence of chief executive officer as

chairman or vice chairman and presence of audit committee and its independence upon

the earning quality of the company. The researcher has identified the governance

mechanism as the independent variable and the earning quality as a dependent variable. A

survey was conducted by the researcher within the limited time frame. Then the data

collected from the survey was interpreted with the help of multiple regressions in SPSS

statistical software. The finding of the research shows very significant and positive

relations between corporate governance mechanism and companys earnings

performance.


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Table Of Contents

Chapter No: 1 .............................................................................................. 10

Introduction ............................................................................................. 10

Chapter No: 2 .............................................................................................. 14

Literature Review ..................................................................................... 14

Chapter No: 3 .............................................................................................. 23

Methodology ........................................................................................... 23

3.1 Theoretical framework.................................................................... 23

3.2 Hypotheses ..................................................................................... 26

3.3 Research design .............................................................................. 27

Chapter No: 4 .............................................................................................. 30

Analysis of data ........................................................................................ 30

Chapter No: 5 .............................................................................................. 38

CONCLUSION ........................................................................................... 38

5.1 Recommendations .......................................................................... 39

References .................................................................................................. 40

Appendix: .................................................................................................... 43

Tables: ..................................................................................................... 43

Survey ...................................................................................................... 50


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Chapter No: 1

Introduction

After the revelations of the big corporate scandals played by the multinational

companies in early 2000's.A lot of work is done in the field of corporate governance

practices. These set of rules were introduced to enhance the check processes on the public

listed companies reporting and disclosures. Corporate governance mechanism is a system

which is applied by the management of the company for better supervision, control and

effectiveness of financial reporting standards in the company. In Pakistan a large amount

of work is done in the field of corporate governance with the increase of people attraction

towards the investment point of view. In this study I am searching out a relation between

the adoption of the corporate governance mechanism and the enhancement in the earning

quality of the company. The reason to select this topic is to promote the practices of code

of corporate governances within the companies to create confidence in investors and also

to enhance earning quality of the companies with better practices of the code. Researcher

wants to find out the role of corporate governance in the implementation of accounting

standards and for this purpose. He finds the relationship between adopting governance

mechanism and the earning quality of the company. The purpose of my research is to see

the impact of adopting corporate governance mechanism on the earning quality of the

company.

This strategy is applied only to view the perception of different people working in

the company at different levels about corporate governance and does it enhances earning

quality of the company. When the survey is conducted different types of opinions were

collected by me. Then I have interpreted their opinions with the help of multiple

regressions in SPSS statistical software and the conclusion on which I have reached is


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that adopting corporate governance mechanism shows significant relation in enhances the

earning quality in terms of high company performance, better financial ratios and increase

in shareholders wealth. The main users of this research study are the existing and the

potential investors of the company. Better compliance with the code of corporate

governance builds confidence among the shareholders or the investors of the company. In

Pakistan these practices of corporate governance are supervised by the security exchange

commission of Pakistan in the all listed companies in Pakistan. All the companies which

are listed have to publish the statement of compliance with the code of corporate

governance to show its compliance with rules regulated by the security exchange

commission of Pakistan. This compliance statement builds confidence among the

investors of the company that their rights are protected and no one is snatching his money

from him.

Another important work performed by the corporate governance structures is to

reduce agency costs and enhance the earnings quality and the reporting. There are

different types of corporate governance mechanism which are widely used in all the

companies listed in Pakistan. Some of them are like; board size in which we see the

number of board of directors appoints by the investors of the company to handle the day

to day operation of the company. They are responsible for all the decision made by the

company and their sole duty is to oversight the controls that are applied within the

company and increases shareholders wealth.

Another important factor in corporate governance mechanism is that board

independence which means what is the percentage of non-executive directors in the

composition of the board. The main reason of it to check the authority that the director

posses within the company and to protect the rights of the shareholders. So the people

who are charged with governance within the company do not manipulate the earnings for


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their personal interests. Formation of the audit committee is the system introduced by the

corporate governance structure to ensure the quality of financial reporting and disclosures

made by the company. It comprises of the non-executive directors only and the head of

that committee is the independent director. The duty of the audit committee is to

oversight the internal controls design by the management of the company and to facilitate

the external auditor during the statutory audit of the company.

Corporate governance mechanisms promote the treatment of equality with the

shareholders. To protect their investment these set of monitory rules applied on the

management of the company. So they will understand their responsibilities towards the

company and also towards the shareholders who has given them their investments to run

the company. Corporate governance also describes the rules and eligibility criteria for

those persons as well who are appointed by the shareholders to handle the management of

the company. This is to ensure that a competent person is handling the matters and

making decisions rationally to increase the companys performance and to maximize

shareholders wealth.

Corporate governance emphasis on the transparency of the data and require proper

disclosures for the work done. It shows that the management of the company is not hiding

anything from the owners of the company or if anyone among the management of the

company tries to manipulate the earnings will be caught. Institutional investors mean

other companies which are investing into our company like insurance companies, mutual

funds and so on.

It is difficult to measure the governance practices in numeric terms that are why

the researcher has conducted a survey regarding good corporate governance practices and

its relation with earning performance of the company. The time frame was limited

although the results which have been obtained from the interpretation of the survey are


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realistic according to the resources that the researcher have while conducting the research.

The researcher has achieved his objectives which show a positive and significant

relationship between adopting governance mechanism and earning quality of the

company.


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Chapter No: 2

Literature Review

Man and Wong (2013) had studied the effect of corporate governance in

eliminating or reducing the earning management extent. They used Anglo-American

system to check the effectiveness of corporate governance system. They have viewed

different corporate governance mechanisms. As a result negative relation with the earning

management is found. The earning quality can be enhanced if the directors are

independent and have sound knowledge in the perspective of finance which will provide

incremental control effects on earning management. Audit committees can oversee the

internal controls of the company for better check and balance on the financial statements

for the assurance of the quality.

Shiri, Vaghfi, Soltani, and Esmaeli (2012) stated that the earning qualities can be

enhanced by reducing the managerial conflicts among the managers and the investors.

This is an inductive study thats why past and historical financial information is utilized.

The quality is tested by increasing the number of independent directors. They tested this

assumption through regression analysis which is aided by the SPSS statistical analysis

software. Then the outcome was that external corporate governance mechanism is

resulted in enhances the earning quality with the help of more independent directors in the

board and they will reduced the conflicts arising among the management and the

investors and also accrual quality is enhanced by it.

Hili and Affes (2012) have empirically tested the impact of gender diversity on

the board of directors effect on the earning quality. This research was conducted on the

French companies. These authors used Arellano and bond autocorrelation test to examine


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GMM. After the analysis of SBF 120 index they have found out that there is no

significant change in the performance of the company with homogeneous (all men) board

in respect to heterogeneous (men and women) board. But this study opens a door of

further research that what is the impact of heterogeneous boards and its implementations

on the performance of the company.

Uadiale (2012) studied the role of board composition and audit committee on the

earning management in Nigeria. They used survey research method on listed companies

of Nigeria. So they suggest that the board of the company must contain a reasonable

number of independent directors and the audit committee members must have a consistent

level of financial background, then the earning management likelihood can be reduced. In

recent years a large amount of attention is given to the earning management of the

company because they are linked to financial statements which are being reported. These

reported statements build the confidence of the investor in the company.

Bistrova and Lace (2012) wanted to search out the relation of weak corporate

governance mechanisms with low earning quality in central and eastern European

countries. They use the regression and the quartile analysis to verify the variables and the

result was a negative relation among low corporate governance practices and poor earning

quality. They have linked the cash flow with the accruals to find it. It seems that the

investors of central and eastern European countries can invest in public listed companies

without any hesitation because the corporate governance level of those companies is high.

So the chances of manipulations in earnings are quite obsolete.

Sirat (2012) investigates the impact of firm size, in the corporate governance

practices on the earning management. They have selected a population size of whole

manufacturing sector listed in Indonesia stock exchange consisting of 157 units. They

have selected 117 units on basis of progress and analyze their data for 5 years from 2002-


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7. The sample if it is a conglomerate company or not. A survey was conducted of the

literature books. Multiple regressions were used to analyze the influence of corporate

governance on the magnitude of earning management. The result was if the size of the

company is huge then the earning will be smaller. The earning management of the

company is better if its family owned then normal structure of the company. So company

size proves negative effect on the earning management of the company.

Abed, Al-Attar, and Suwaidan (2012) studied the impact of corporate governance

mechanism on the earning qualities for Jordanian firms 2006-9. They conducted this

research on the companies which are being listed in Amman Stock Exchange. They used

the multiple OLS regression analysis with the help of SPSS version 17. The findings

show no significant relation among the corporate governance mechanism and earning

management except the board size. The number of board of members must not be huge so

that the earning management can be reduced by management size.

Dichev, Graham, Harvey, and Rajgopal (2012) find out some things which

describe the earning qualities variations through large survey and conducting interviews

of the people charge with governance. High qualities of earnings are backed by actual

cash flows. Earning quality is also driver by discretionary factors as well. Earning

manipulations are inevitable when the controls in the company are more effective. The

half of the earning qualities is determined by business model, macroeconomics factors.

Athanasakou and Olsson (2012) search out the two different perspective of

corporate governance first, the impact of innate earning quality with the practices of

corporate governance and secondly, the impact of environment of the company

performance. They use different measures like, accrual quality, absolute abnormal

accruals and earning variability to interpret the data. The result they have find out that

there is a positive relation between the both perspectives of corporate governance.


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Accrual diversity has positive effect on the performance of the company. This also shows

a positive relation among the environment and the performance of the companies like

motivation and rewards enhance the performance of the employee which ultimately

enhance the earning quality or the performance of the company.

Campa and Donnelly (2011) investigated the impact of corporate governance on

the earning quality in the legal context. They have compared two legal corporate contexts.

One of them is Italy and the other one is UK. In result they have found out that where the

legal context of the country is weak the corporate governance plays a major role in the

enhancement of the earning quality. Government needs to formulate new policies through

which a better control can be established over the earning qualities.

Sun, Liu, and Lan (2011) investigated if there any difference in the earning

management quality if the head of department is a female. They have observed a

company for five years but as a result they find no association among this gender

discrimination in the corporate sector. There is no change in earning qualities if the head

of the department is a female but the environment is quite pleasant than usual.

Moradi and Nezami (2011) studied the effect of ownership centralization and

institutional ownership with the earning quality. They have conducted research on

companies listed in Tehran stock exchange. The authors have applied Linear regression

and correlation analysis, Fisher test and t-testate to test their hypotheses. In general the

result shows positive relation among ownership centralization and institutional ownership

but this relation is not significant enough or in other words the companies listed in Tehran

stock exchange are less affected with this in measuring earning quality.

Wang and Gulzar (2011) investigated the impact of corporate governance

practices in reducing earning management in shanghai and Shenzhen stock exchange,

china. They applied correlation and regression analysis on the governance practices of the


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firms listed in these stock exchanges. The outcome of their research was a negative

relationship is established between earning management and corporate governance

characteristics like number of board of directors, their duality, their sex, and their

ownership structure in china. We also find that the concentrated ownership reduces

discretional current accruals by preventing opportunistic mangers behavior. This research

has broadened the scope of earning management and corporate governance characteristics

especially for china because in china no one has conducted such type of research before.

Liang and Shan (2011) investigated the impact of IFRS mandatory adoption on

the quality of earnings and if the effectiveness of the corporate governance mechanism

can be used as a proxy in determining the quality of the earnings. They compare the

accrual quality of before and after mandatory adoption of IFRS in two countries of

Europe specifically UK and Germany. The results show the enhancement in the quality of

the earning in post mandatory adoption of the IFRS and the adoption of corporate

mechanisms shows positive relation with earning quality of the firm.

Houqe, Zijl, Dunstan, and Karim (2010) tested that the IFRS adoption does not

increase the earning quality of the company but if the investors protection regime is

strong then the IFRS enhances the quality of the earnings in the company. This study is

conducted with the reference of cross- section among different countries. They have

conducted research on UK and German based companies. The result show positive

relation among the investors protection regime and the quality of earning in the

company. This result might be different under different investor protection regime

policies applicable in different countries.

CHEN and LIU (2010) had investigated the impact of changes in the best

corporate governance practice principle on the earning quality in the emerging markets.

They use regression analysis among pre and post CGBPP to test their hypothesis. The


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outcome of their research was that the independence of corporate boards enhance the

management opportunistic earnings because in the absence of the independent board the

earning management of the company in emerging markets and in opportunities reduces

because if, the check and balance on the monitory system is reduced. Then the board can

manipulate earnings and show biasness in decision making.

Almeida, Lima, and Lima (2010) wanted to find out the performance of the

Brazilian listed companies to get listed in the New York stock exchange. They used

correlation and regression analysis among the companies listed in Brazilian and New

York stock exchanges. The evidence from the finding was that good corporate practices

are required to enhance the earning quality of the Brazilian firm to get listed in the New

York stock exchange.

Leuz (2010) describes the reliability of earning quality in different legal context

with in different countries legal systems. The outcome of his research was different

countries have different legal requirements to fulfill the principles of corporate

governance to enhance earning quality. If there is any difference in convergence of these

regulatory principles then IFRS adoption will be utilized as a benchmark.

Sivaramakrishnan and Yu (2008) used the Gompers index as a tool to measure

the strength of corporate governance, investigate whether accrual quality and governance

structure effect the earning quality of the firm. The outcome of the result was that, if the

corporate governance is high, then earnings quality is enhanced. Good governance

provides high quality of accruals diversity which ultimately enhances the earning quality

and increases the quality earning predictability of the firm.

Javed, Iqbal, and Hasan (2006) find out the relation of corporate governance

practices with firm performance in Karachi stock exchange listed companies. A very low

work is done in this field in Karachi stock exchange. They used Tobin Q, CGI and other


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control variables to construct a model and take average of these three years 2003-5. The

result was there was a positive relation among in firm level governance practices with the

performance of the company. They also find out that only relaying on the corporate

governance practices disclose in the annual reports are not enough to evaluate the

reliability of the firm performance or earning quality. Strict rules should be regulated by

the Karachi Stock Exchange to enhance the performance of the companies which are

being listed in it.

C and Vera-Muoz (2005) studied the tremendous change brought recently in the

corporate governance practices, where the roles and responsibilities of the audit

committee members and the board of directors were redefined to improve the quality of

earnings and reporting within the firm. The findings were that, the duties of the audit

committee members were enhanced because they have to monitor the controls applied by

the management over the financial statements. If the members of the audit committee are

not competent enough then there will be chance of manipulations in the controls due to

which the reliability of the quality of earnings will be affected. The members of the audit

committee are independent from the management because their independence increases

the credibility of the financial reporting.

Chen, Elder, and Hsieh (2005) investigated the impact of corporate governance

practices on the Taiwan listed companies. They want to find out the impact of voluntary

creation of independent directors on the earning quality. They use the regression model to

test the relation of corporate governance to earning management. The outcome of the

research concludes a negative relation among the number of independent directors and the

likelihood of earning quality. Our study also demonstrate the voluntarily adoption of best

corporate governance practice principles might enhance the effectiveness of independent

directors in constraining earning management in Taiwanese listed companies.


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Easley and OHara (2004) investigated that, the firms in which the executives and

the managers owned the stocks of the company. They tried to enhance the earning quality

of the firm by any means necessary. They also concluded that irrespective of how you

understand the governance mechanisms. It will reduce the information asymmetry and

enhance the reporting quality of the firm. In result better financial reporting enhances

earning quality as well. By doing this the firm information becomes more reliable and

proves to be useful in creating confidence among the investors. Investors feel safe due to

the quality of information which is provided to them.

Ismail (2002) investigated the relation between the earning quality and the

corporate practices after the implementation of the Malaysian code 2001. The findings of

the research were that, the number of members in the board and in the audit committee

show positive relation with the earning quality. If the number of members in the board

and in audit committee is higher then, they can perform their duties more efficiently and

in result to which earning qualities were enhanced. The result also defines that the

companies with concentrated ownership like (family owned) have low earning quality

then the firms which do not have concentrated ownership.

Lang, Becke, and Blan (2002) studied the opportunity for the investors in current

situation. The result was that to promote the investors confidence we need to enhance the

corporate governance practices. These rules are regulated by the stock exchange to

promote investors confidence. When these rules are strictly monitored then the

performance of the firm increases so as the earning quality

Rehman and Ali (2001) investigated that the earning management can easily be

manipulated by the firms with in the applicable financial reporting framework within the

firm. So there is a need to establish the best practices of the corporate governance. So,

that the firm cannot manipulate the adoption choices which are provided by the


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international financial reporting standards for better presentation. These corporate

governance practices will enhance the earning management of the firm.

Bebchuk and Roe (1999) investigates the impact of different economies on the

corporate structure of the firms which will affect its earning management. The findings

were the economies of some countries promote the corporate structure to be family

owned or institutional owned. Such kind of corporate structure is efficient but if there is

an involvement of the independent members in the structure then the reliability on the

quality of earning and reporting can be enhanced further.

Yermack (1996) investigated that, the efficiency of the companies with small

board size is more effective than others. The researcher proposed that, if the board size is

small and only competent persons are members of such board then, they can work more

efficiently and due to small board size the earning management will be enhanced.

Another very important characteristic of corporate governance is that the chair person and

the chief executive officer must be two different persons to avoid the concentration of

power in one hand which can lead the company into the conflict of interest and reduces

earning quality.

Cheng (1996) demonstrated the existence of this link between the quality of

earnings and the information content of earnings. They found that the permanent

accounting earnings are less informative in relation to future earnings and cash flows.

Earning qualities are more reliable when the opportunistic behavior of the managers is

monitored by the control system of the company. In other words monitoring attributes

have the capacity to improve the earning qualities. So, effective internal control system

can play a role in the enhancement of the earning qualities as well.


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Chapter No: 3

Methodology

3.1 Theoretical framework

Research on corporate governance is increasing due to large financial crisis in past

few decades. The dependent variable of interest in this research is earning quality. I

attempt to explain the variance in this dependent variable by six independent variable (1)

percentage of non-executive directors members, (2) absence of CEO as chairman or vice

chairman, (3) percentage of institutional investors (4) Audit committee size (5) Board size

(6) Gender diversity in composition of board. In my view these variables can explain the

earning quality better because on these variables I can measure the impact of corporate

governance mechanisms adopted by the company.

The non-executive directors are the ones appointed in the composition of the

board to exercise the rights of the board members. They dont have any kind of financial

or personal interest in the earnings of the company. They are elected on the board on

check the independence of the board of directors in decision making and to protect the

rights of the shareholders. Absence of CEO as chairman, CEO is the chief executive

officer of the company he is the one who is authorized to signed the agreements on the

behalf of the company. He makes the decisions of the company rather chairman is one

who is the head of the board of directors. He is responsible to conduct meetings of the

board and to communicate the agenda with the board members. Chairman is responsible

to lead the discussion in the board meeting. He must remain neutral in the discussion to

conclude the decision. Percentage of institutional investors shows how much people are

pooling wealth into the company. If large number of people is putting their wealth then


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they want to influence their decisions in the company which can affect the decision

making of authorize people or can create biasness among them. Audit committee is

formed to oversight the financial reporting of the company and the process of disclosures.

The members appointed in the audit committee are from the board of directors and a

separate chairman is also appointed for the audit committee. Audit committee also

ensures the compliance of the company with rules and regulations, ethics and with all

statutory requirements. Gender diversity means the percentage of male and female on the

composition of the board and their impact on the earning quality of the company.


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Symmetric Diagram

Independent Variable Dependent Variable

The numbers non-executive directors play an important role in the earning quality

of the company. Thats why non-executive directors are hired on the composition of the

board to maintain the check and balance on the performance of the company. These

independent members over sight the methods used by the management of the company in

reporting. These non-executive directors are appointed to protect the right of share

holders. CEO of the company is most important person in any structure of the company.

He is the person who binds the company in different types of agreements. The final

decisions are taken by this person in the company. He handles all the operations of the

company. If he is not the chairman of the board then, it might happen that there been a

rise of conflict among the CEO and the chairman of the company. If the chairman

concludes the session of the board meeting and the CEO doesnt agree with him then


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there will a conflict. The earning quality is affected due to this reason. (Uadaile, 2012)

said board composition and the independence of audit committee play significant role in

the earning quality. The percentage of institutional investors plays a very important role

in the earning quality of the company. If the percentage of investors is high then they

want voting rights or to oversight the decisions which were taken by the management.

This will affect the managements capabilities of doing the work according to prescribed

principles.

The investors influence for greater return can affect the earning quality of the

company. Audit committee oversight the reporting quality and the disclosures made by

the management of the company which will ultimately affect the earning quality of the

company.(Affes,2012) said that gender diversity has significant relation with the earning

quality. If the percentage of non-executive directors on the board is high then the earning

quality will be enhanced in terms of performance of the company. Better corporate

governance practices will results in better performance in the company and enhance

earning quality.

3.2 Hypotheses

H1: there is a significant relationship exists between adopting governance mechanism and

enhancing earning quality.

H0: there is no significant relationship exists between adopting governance mechanism

and enhancing earning quality.


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3.3 Research design

3.3.1 Problem to be investigated

In this research the problem which was investigated was the impact of adopting

governance mechanism on enhancing earning quality. This study is very important

because these set of governance rules and regulations which are imposed on the listed

companies are to enhance the transparency and disclosures quality of the company. This

will result in enhancing the earning quality of the company. This research is important

because some people thought that applying governance practices in the company is only

the waste of time and resources and it does not help in enhancing any kind of companys

performance. The main users of this research will be the investors because good

governance practices create confidence among the investors of the company and enhance

company earning quality.

3.1.2 Scope of Study

This is a qualitative study thats why questionnaires were made keeping in view

the independent variables and the dependent variables of the study. This study was

conducted through the survey which was conducted from different corporations to test the

relationship among the governance practices and earning quality. The research is realistic

and its practically applicable in industries. Good governance adoption enhances the

economic growth as well with companys earning quality. Governance plays an important

role in building confidence among the investors of the company. Thats why a lot of

importance is given to governance practices now-a-days within the listed companies in

Pakistan. This study helps the potential investors of the company to gain confidence on


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the companys in which they have invested and due to increase of performance in the

company they can expect larger returns as well.

3.1.3 Sources of data

The required information for this research paper is gathered from following two

sources:

I have studied different literature and go through the history of research studies, by meansof studies in library (including books, articles, journals and academic discussions) is used

and foreign research papers and theses are also used in this study work which has been

received via the internet service.

The data calculated from the survey for the study of variables like (percentage of non-executive directors, absence of CEO as a chairman or vice chairman, size of audit

committee the percentage of the institutional investors, gender diversity in board

composition and earning quality) are required to test the assumptions made.

3.1.4 Relevance of data

The data which was collected from the survey is relevant because it provide

sufficient information regarding the variables which I have selected to find the relation

among the governance and the earning quality. The study is applicable and is conducted

within a specific time frame. The data is reliable because the survey is conducted within

the corporations and its findings justify the variables of concern.

3.1.5 Model of study

To interpret the results conducted from the survey multiple regressions is used.

Multiple regressions are the best model to show the relation between the independent and


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the dependent variables in the study. This model provides me with best results of the

impact of governance mechanism on earning quality.

Following regression equation is formed to explain the impact of governance mechanism

on earning quality.

EQ=0+1CEO+2IND+3AUD+4SIZE+5GEN+6INV

EQ= Earning Quality

CEO= Absence of chief executive officer as chairman

IND= Board independence

AUD= Audit committee size

SIZE= Board size

GEN= Gender diversity

INV= Percentage of institutional investors

0 = constant

1,2,3,4,5,6 = Coefficients


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Chapter No: 4

Analysis of data

Here is the interpretation of the results of SPSS.

Model Summary

Model R

R

Square

Adjusted

R Square

Std.

Error of

the

Estimate

Change Statistics

Durbin-

Watson

R

Square

Change

F

Change df1 df2

Sig. F

Change

1 .978a .956 .867 .26950 .956 10.744 6 3 .039 1.689

a. Predictors: (Constant), does gender diversity affect earning quality of the company,

does board size of the company enhance earning quality, percentage of institutional

investors affect earning quality, absence of chief executive officer as a chairman affect

earning quality, board independence enhances the earning quality, audit committee size

affect the earning quality of the company

b. Dependent Variable: Earning Quality

This model summary describes the goodness of the model. R square represents

the effect of independent variable upon the dependent variable. Adjusted R square

represents the impact of dependent variable on the independent variable. The range of the

value of the R square and the adjusted R square lies between 0 and 1. If it shows value

nearer to 1 than it represents a good model exist. If it shows value nearer to 0 than it


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represents the model that exists is bad. The outcome of my result of R square and the

adjusted R square is 0.956 and 0.867 which shows a good model exists. It means under R

square the value 0.956 shows change in dependent variable which is earning quality due

to change in independent variable that was governance mechanism.

The value of adjusted R square will be lower than value of R square or it might be

equal to it. The value of adjusted R square can only be higher than the value of R square

in one condition and that is if I added some extra variables in the analysis of data. But in

our data the value of adjusted R square is lower than R square with means my data is

good no extra variables were utilized in the analysis of data.

Standard error of estimation shows the reliability of the data that is interpreted in the

SPSS. If the value of standard estimation of data is below 1 than it represents the data is

reliable. In the model summary the value of standard error is 0.26950 which is lower than

1. So it shows reliability of the data.

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 4.682 6 .780 10.744 .039a

Residual .218 3 .073

Total 4.900 9


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a. Predictors: (Constant), does gender diversity affect earning quality of the company,

does board size of the company enhance earning quality, percentage of institutional

investors affect earning quality, absence of chief executive officer as a chairman affect

earning quality, board independence enhances the earning quality, audit committee size

affect the earning quality of the company


This anova table represents the measure of variance among the variable of the data.

This table measures the difference between the variables so that relationship can be

measured. In anova table the value of sig or P value must be lower than 0.05 then it

represents that the data is significant. The outcome of data is 0.039 which is lower than

0.05 which shows that model is significant and is accept as well. When the value of sig or

P value is lower than 0.05 then we reject the assumption of the null hypothesis another

aspect to see the significance of data is F value. If the F value in the annova table is

greater than 4 than data is significant. The results show 10.744 hence another proof of

significance.


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Coefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

95%

Confidence

Interval for B Correlations

Collinearity

Statistics

B

Std.

Error Beta

Lower

Bound

Upper

Bound

Zero-

order Partial Part Tolerance VIF

1 (Constant) -.564 1.141 -.494 .655 -4.196 3.068

board independence

enhances the earning

quality

-.049 .132 -.061 -.371 .735 -.467 .370 .131 -.209 -.045 .552 1.810

audit committee size

affect the earning

quality of the company

-.866 .199 -1.166-

4.342.023 -1.500 -.231 -.318 -.929 -.529 .205 4.869

percentage of

institutional investors

affect earning quality

.453 .183 .501 2.471 .090 -.131 1.037 .000 .819 .301 .360 2.779

absence of ceo as a

chairman affect

earning quality

.455 .172 .436 2.639 .078 -.094 1.003 .106 .836 .321 .544 1.839

does board size of the

company enhance

earning quality

.377 .222 .403 1.701 .187 -.328 1.082 -.229 .701 .207 .264 3.784

does gender diversity

affect earing quality of

the company

.763 .109 1.138 6.973 .006 .415 1.111 .561 .971 .849 .556 1.797

a. Dependent Variable: Earning

Quality


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Earning Quality and Board independence:

Regression Equation

EQ=0+2IND

EQ= -0.564-0.49IND

This equation shows that if 1 unit of board independence is changed it will bring

0.49 decreases in earning quality. So a negative relation exists between these two

variables.

Standard Error

If the value of standard error is below than 0.5 than the results are significant

otherwise they are insignificant. My standard error for this variable is 0.132 which means

the results are significant.

T test

If the value of t test is greater than 2 than it means the model is significant or vice

versa. The T value for this variable is 0.371 which means the model is insignificant.

Earning Quality with Audit committee size

Regression Equation

EQ=0+3AUD

EQ= -0.564-0.866AUD

This equation shows that if the size of the audit committee changes by 1 unit it will

decrease the earning quality by 0.866. It shows negative relation exist between these two

variables.


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Standard Error


otherwise they are insignificant. The result for this variable shows the value of 0.199

which means the results are significant.

T test


versa. The T value for this variable is 4.342 which mean the model is significant.

Earning Quality with Percentage of institutional investors

Regression Equation

EQ=0+6INV

EQ= -0.564+0.453INV

This equation shows that if percentage of institutional investors changes by 1 unit it

will increase the earning quality by 0.453. It shows positive relation exists between these

two variables.

Standard Error




T test



Earning Quality with Absence of the CEO as a chairman


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Regression Equation

EQ= 0+1CEO

EQ= -0.564+0.455CEO

This equation shows that if any changes come in the absence of chief executive

officer as the chairman by 1 unit it will increase the earning quality by 0.455. It shows

positive relation exists between these two variables.

Standard Error




T test



Earning Quality with Board Size

Regression Equation

EQ= 0+4SIZE

EQ=-0.564+0.377SIZE

This equation shows that if the board size of the company changes by 1 unit it will

increase the earning quality by 0.377. It shows positive relation exists between these two

variables.

Standard Error





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Page 37

T test


versa. The T value for this variable is 1.701 which means the model is insignificant.

Earning Quality with Gender Diversity

Regression Analysis

EQ=0+5GEN

EQ=-0.564+0.763GEN

This equation shows that if the gender diversity on the composition of the board

changes by 1 unit it will increase the earning quality by 0.763. It shows positive relation

exists between these two variables.

Standard Error




T test




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Chapter No: 5

CONCLUSION

This study finds out the relation between the adoption of corporate governance

mechanism and earning quality. After the detailed study a survey was conducted and the

data collected through that survey is entered into the SPSS and the results were obtained.

These results show different levels of significant of earning quality the dependent variable

with the different independent variables in the data. The results show positive and

significant relation exists among the adopting corporate governance mechanism and

enhancing earning quality. Multiple regression analysis is used to find out the impact that

the governance practices have on enhancing earning quality.

The analysis found that board independence has negative relation with the earning

quality of the data which means 1 unit change in board independence decreases earning

quality by 0.49. The value of standard error shows significant relation exists among them

and T value shows the model is insignificant.

The analysis found that audit committee size has negative relation with the earning

quality which means 1 unit change in audit committee size decreases the earning quality

by 0.866. The value of standard error shows significant relation exists among them and T

value shows the model is significant.

The analysis found that percentage of institutional investors has positive relation

with the earning quality which means 1 unit change in percentage of investors increases

the earning quality by 0.453. The value of standard error shows significant relation exists

among them and T value shows the model is significant.


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The analysis found that absence of chief executive officer as chairman has

positive relation with the earning quality which means 1 unit change in absence of chief

executive officer as chairman increases the earning quality by 0.455. The value of

standard error shows significant relation exists among them and T value shows the model

is significant.

The analysis found that board size has positive relation with the earning quality which

means 1 unit change in board size of the company increases the earning quality by 0.377.

The value of standard error shows significant relation exists among them and T value

shows the model is insignificant.

The analysis found that gender diversity among board composition has positive

relation with the earning quality which means 1 unit change gender diversity among

board composition increases the earning quality by 0.763. The value of standard error

shows significant relation exists among them and T value shows the model is significant.

The value of R square shows the significance of the whole model. My result shows 0.956

which is closer to 1. It means my model as a whole is significant. I have rejected the null

hypothesis because my F value is greater than 4. Finally the overall conclusion on the

analysis is that corporate governance mechanisms have significant relation in enhancing

the earning quality.

5.1 Recommendations

Governance mechanism should also be adopted by unlisted companies.

Concentrated ownerships enhance the earning quality.

Companies should use different types of approaches towards adopting governance

mechanism to enhance earning quality.


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Appendix:

Tables:

Descriptive Statistics

Mean Std. Deviation N

Earning Quality 4.1000 .73786 10

board independence enhances the earning

quality4.2000 .91894 10

audit committee size affect the earning quality of

the company4.1000 .99443 10

percentage of institutional investors affect

earning quality4.0000 .81650 10

absence of ceo as a chairman affect earning

quality4.5000 .70711 10

does board size of the company enhance earning

quality4.2000 .78881 10

does gender diversity affect earing quality of the

company3.9000 1.10050 10


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Correlations

Earning

Quality

board

independence

enhances the

earning quality

auditcommittee

size affect

the earning

quality of

the

company

percentageof

institutional

investors

affect

earning

quality

absenceof ceo as

a

chairman

affect

earning

quality

doesboard size

of the

company

enhance

earning

quality

does

genderdiversity

affect

earing

quality of

the

company

Pearson

Correlation

Earning Quality 1.000 .131 -.318 .000 .106 -.229 .561

board

independence

enhances the

earning quality

.131 1.000 .219 -.148 .342 .552 .132

audit committee

size affect the

earning quality of

the company

-.318 .219 1.000 .547 -.237 .538 .416

percentage of

institutional

investors affect

earning quality

.000 -.148 .547 1.000 -.192 -.173 .247

absence of ceo as

a chairman affect

earning quality

.106 .342 -.237 -.192 1.000 .199 -.500

does board size of

the company

enhance earning

quality

-.229 .552 .538 -.173 .199 1.000 .026


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does gender

diversity affect

earing quality of

the company

.561 .132 .416 .247 -.500 .026 1.000

Sig. (1-tailed) Earning Quality . .359 .185 .500 .385 .262 .046

board

independence

enhances theearning quality

.359 . .272 .342 .167 .049 .358

audit committee

size affect the

earning quality of

the company

.185 .272 . .051 .255 .054 .116

percentage of

institutional

investors affect

earning quality

.500 .342 .051 . .297 .317 .245

absence of ceo as

a chairman affect

earning quality

.385 .167 .255 .297 . .291 .071

does board size of

the company

enhance earning

quality

.262 .049 .054 .317 .291 . .472

does gender

diversity affect

earing quality of

the company

.046 .358 .116 .245 .071 .472 .

N Earning Quality 10 10 10 10 10 10 10

board

independence

enhances the

earning quality

10 10 10 10 10 10 10


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Page 46

audit committee

size affect the

earning quality of

the company

10 10 10 10 10 10 10

percentage of

institutional

investors affect

earning quality

10 10 10 10 10 10 10

absence of ceo as

a chairman affect

earning quality

10 10 10 10 10 10 10

does board size of

the company

enhance earning

quality

10 10 10 10 10 10 10

does gender

diversity affect

earing quality of

the company

10 10 10 10 10 10 10

Variables Entered/Removedb

Model Variables Entered Variables Removed Method

1 does gender diversity affect earing

quality of the company, does board

size of the company enhance earning

quality, percentage of institutional

investors affect earning quality,

absence of ceo as a chairman affect

earning quality, board independence

enhances the earning quality, audit

committee size affect the earning

quality of the companya

. Enter

a. All requested variables entered.



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Page 47

Coefficient Correlationsa

Model

does gender

diversity

affect

earing

quality of

the

company

does board

size of the

company

enhance

earning

quality

percentage

of

institutional

investors

affect

earning

quality

absence of

ceo as a

chairman

affect

earning

quality

board

independence

enhances the

earning

quality

audit

committee

size affect

the earning

quality of

the

company

1 Correlations does gender

diversity affect

earing quality of the

company

1.000 .258 .098 .452 -.367 -.301

does board size of

the company

enhance earning

quality

.258 1.000 .645 -.183 -.369 -.784

percentage ofinstitutional

investors affect

earning quality

.098 .645 1.000 -.198 .002 -.774

absence of ceo as a

chairman affect

earning quality

.452 -.183 -.198 1.000 -.385 .252

board independence


quality

-.367 -.369 .002 -.385 1.000 .078


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affect the earning

quality of the

company

-.301 -.784 -.774 .252 .078 1.000

Covariances does gender

diversity affect

earing quality of the

company

.012 .006 .002 .009 -.005 -.007

does board size of

the company

enhance earning

quality

.006 .049 .026 -.007 -.011 -.035

percentage of

institutional

investors affect

earning quality

.002 .026 .034 -.006 4.293E-5 -.028

absence of ceo as a

chairman affect

earning quality

.009 -.007 -.006 .030 -.009 .009

board independence


quality

-.005 -.011 4.293E-5 -.009 .017 .002


affect the earning

quality of the

company

-.007 -.035 -.028 .009 .002 .040

a. Dependent Variable: Earning Quality


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Residuals Statisticsa

Minimum Maximum Mean Std. Deviation N

Predicted Value 3.1241 5.2216 4.1000 .72127 10

Residual -.22159 .24732 .00000 .15560 10

Std. Predicted Value -1.353 1.555 .000 1.000 10

Std. Residual -.822 .918 .000 .577 10


Collinearity Diagnosticsa

Model Dimension Eigenvalue

Condition

Index

Variance Proportions

(Constant)

board

independence

enhances the

earning

quality

audit

committee

size affect

the

earning

quality of

the

company

percentage

of

institutional

investors

affect

earning

quality

absence

of ceo as

a

chairman

affect

earning

quality

does

board

size of

the

company

enhance

earning

quality

does

gender

diversity

affect

earing

quality

of the

company

1 1 6.813 1.000 .00 .00 .00 .00 .00 .00 .00

2 .080 9.209 .00 .03 .01 .01 .04 .01 .19

3 .046 12.234 .00 .10 .00 .13 .01 .01 .19

4 .036 13.751 .01 .00 .12 .00 .04 .05 .15

5 .016 20.650 .04 .75 .00 .11 .03 .09 .06

6 .006 34.951 .27 .04 .27 .12 .85 .15 .16

7 .003 47.212 .68 .08 .59 .63 .03 .70 .25



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Survey

Survey for adopting governance mechanism enhancing earning quality

Name:______________________________

Date:_______________________

1. Governance mechanism has significant impact on enhancing earning quality.Strongly

Disagree

Disagree Agree Strongly Agree Neither agree or

disagree

2. Absence of CEO as the chairman of the board is significant in enhancing earningquality.

Strongly

Disagree


disagree

3. Large number of board of directors is significant in enhancing earning quality.Strongly

Disagree


disagree

4. Non-executives directors reduce managerial conflicts among the management andinvestors to enhance earning quality.

Strongly

Disagree


disagree

5. Audit committee size is significant in enhancing earning quality.Strongly

Disagree


disagree

6. The number of non-executive members in the board enhances control on earningmanagement.

Strongly

Disagree


disagree

7. Non-executive directors in board composition shows significant relationship withEarning quality


51/51

Strongly

Disagree


disagree

8. Gender diversity among the board members affects the performance of the company.Strongly

Disagree


disagree

9. If the firm size is larger than it is difficult to apply corporate governance mechanismsto enhance companys efficiency.

Strongly

Disagree


disagree

10. If the CEOs holding is increasing in the company will it affect the companysperformance?

Strongly

Disagree


disagree

11. If the percentage of institutional investors is high will it affect the earningperformance of the company?

Strongly

Disagree


disagree

12.Does large board size composition reduces earning management in the company?Strongly

Disagree


disagree

.

role of corporate governance in implementing ifrs in listed companies of pakistan

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