Mediating Role of Earnings Management upon Nexus of Corporate Governance Variables and Firm Performance: An Evidence from Manufacturing Firms of Pakistan

Abstract

The study examines the mediating impact of earnings management upon the relationships identified between selected corporate governance characteristics and firms’performance by using the sample of all non-financial KSE-100 index companies for the years 2009 to 2017. The corporate governance characteristics relating to BoD, ownership structure, external audit quality and audit committeeindependence were incorporated in research analysis. The levelof discretionary accruals wasused as a proxy of earnings management as per Modified Jones Model (1995). Preacher and Hayes’ (2004) mediation model was applied to establish the mediation effect of earnings management. Results of the study reveal that the audit committee independence has a negative association with the firm performance. The board independence was also found to be negatively associated with profitability variables like ROA and ROE. Rest of the constructs (board size, CEO duality, big4 audit firms and ownership structure) have insignificant relationship with firm performance. Moreover, earnings management had no relationship with the characteristic of corporate governance.