Value Relevance of Earnings Quality: Importance of Corporate Governance, Ownership Structure and Group Affiliations in the Listed Firms of Pakistan

Abstract

This study is an endeavor to answer the question that does corporate governance, ownership pattern and business group affiliation effect value relevance of reported earnings quality in a sample of 300 listed Pakistani firms for the period of 2006-2018. The study uses earnings response coefficient and earning predictability as proxy of reported earnings quality. The panel data analysis shows that CEOduality and director ownership have significant inverse effect on the quality of reported earnings i.e. the two do not contribute towards improvement of quality of reported earnings. Whereas board independence, independence of audit committee and external audit from big4, institutional ownerships have significant direct effect on the quality of reported earnings. Moreover, it is observed that these effects are relatively more prominent in the case of group firms. Furthermore, firm size, earning persistence, growth and leverage have positive association with the quality of reported earnings while beta has significant negative effect on the quality of earnings. Further, it is found that in times of financial crisis, firms improve its reporting quality to uphold confidence of the investors where group firms showed relatively more tending to pursue this practice. This study has several implications for shareholders, prospect investors, external auditors and regulators. This is the first study of its nature that has investigated the role of group affiliation with reported earning quality. Key words: Earnings quality, corporate governance, ownership structure, business group affiliation, ERC.