Influence of Political and Military Connections, Corporate Governance and Ownership Concentration on Earnings Quality in Pakistan
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UNIVERSITI MALAYSIA SARAWAK
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The study examines the influence of political and military connections, corporate governance and ownership concentration on earnings quality. To achieve this objective the study uses a sample of 238 active listed non-financial companies in Pakistan for the period 2009-2015. This resulted in a sample size in excess of 1600 firm-year observations. The objectives of the study were achieved through the use of twelve econometric model specifications and tests of ten hypotheses. The econometric models were estimated through the use of robust (iteratively reweighted) regression and quantile regression approaches. In addition, diagnostic analysis and robustness checks reveal that the results are stable and reliable over the sample period. The study has used three distinct measures of discretionary accruals as proxies for earnings quality, i.e. Jones model, modified Jones model and the performance matched discretionary accruals model. Moreover, political and military connections were identified when firms had explicit and implicit links with politicians and military institutions. The role of corporate governance was measured through the use of four board of directors’ attributes, i.e. board independence, board size, board meetings and board financial expertise. In addition, ownership concentration was incorporated through the inclusion of variables for family ownership and block-holder ownership. Overall, the results of the study indicate that political connections, corporate governance and ownership concentration have a profound influence on earnings quality. While political connections are found to have a negative influence on earnings quality, the study did not find a significant effect due to military connections. Contrary to the assertions of agency theory, the study finds that a large board size and a greater number of board meetings diminishes earnings quality. In addition, board independence does not have a significant effect on iv earnings quality. However, the results also suggest that board financial expertise enhances earnings quality. With regard to ownership concentration, the study finds that both family ownership and block-holder ownership undermine the earnings quality of a firm. Moreover, both family ownership and block-holder ownership exacerbate the influence of political connections on earnings quality. Hence, the overall findings of the study support the predictions of the positive accounting theory and resource dependence theory. The study contributes to the existing body of knowledge by adopting a holistic approach to examine the influence of political and military connections, corporate governance and ownership concentration on earnings quality in the context of Pakistan. The study also provides useful insights to policymakers, academicians and managers that play a crucial role in developing or implementing the corporate governance and financial reporting framework in Pakistan for the benefit of all stakeholders.