Abstract
Even now with the cutting edge businesses and specialized management, a large number of the firms are owned by families in Pakistan. Agency disagreements and issues exist between the management and the owners as well as the minority shareholders and the block holders. To handle these feuds, accountants use discretionary accruals. These accruals help to manage earnings and smooth sharp trends to protect the interest of management and the owners. This study determines whether the investors manage the earnings through discretionary accruals or do they price these accruals when considering the stock price. This study finds significant evidence that the market prices discretionary accruals. We find that the firms with higher number of institutional ownership, high quality audit production and higher number of independent board have significantly higher impact of discretionary accruals on their stock returns as compared to other firms.
Highlights
In today’s modern business, most of the firms are owned by the families
This paper further investigates whether ownership structure, firm size and corporate governance practices affect the discretionary accruals of the firm or not and do investors view discretionary accruals differently in the existence of good corporate governance practices
This study examined the pricing of discretionary accruals and investigates that whether market attaches any value on discretionary accruals
Summary
In today’s modern business, most of the firms are owned by the families. Major agency conflict and issues exist between the management and the owners but between the minority shareholders and the management (controlling family) as well. Trust holds a key position in today’s financial analysis procedures due to increased agency conflicts. Management is answerable to the shareholders for their each and every decision. There are many other stakeholders in the firm and everyone tries to make such decisions into his/her best interest. A need has been observed which leads to the concept of emerged appropriate corporate governance. Securities and exchange commission of Pakistan gave a code of Corporate Governance. Good governance is a sign of good corporate performance as it prevents the stampede on the rights of minority shareholders and ensures better decision making
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