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Earnings Quality: A Missing Link between Corporate Governance and Firm Value

Author

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  • Khalid Latif

    (International Islamic University, Islamabad)

  • Arshad Ali Bhatti

    (International Islamic University, Islamabad)

  • Abdul Raheman

    (International Islamic University, Islamabad)

Abstract

The existing literature concerning governance-value relationship is inconclusive as it assumes that the association is direct. A theoretical argument suggests that the effective corporate governance reduces the information asymmetry through better financial reporting quality. This serves as a tool to reduce this information risk. Following the argument, our study is an attempt to investigate the mediating role of earnings quality, a measure of financial reporting quality, in governance-value association. For estimation, we use a panel data of 214 non-financial listed firms in Pakistan for the period 2003-2014 and employ one-way random effect estimator for the SUR system, as suggested by Biørn (2004). Our findings show that the corporate governance effectively improves the earnings quality and value of the firm, which approves the monitoring role. Moreover, earnings quality contributes positively in maximizing the value of the firm and the results demonstrate that better earnings quality partially mediates the governance-value association. It is concluded that corporate governance not only improves the value of the firm directly, but also indirectly through the channel of earnings quality.

Suggested Citation

  • Khalid Latif & Arshad Ali Bhatti & Abdul Raheman, 2017. "Earnings Quality: A Missing Link between Corporate Governance and Firm Value," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(2), pages 255-280, June.
    • Handle: RePEc:bec:imsber:v:9:y:2017:i:2:p:255-280
    DOI: dx.doi.org/10.22547/BER/9.2.11
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    2. Nguyen Van Nguyen & Quang Linh Huynh, 2019. "The Importance of Earning Quality and Organizational Reputation to Financial Effectiveness," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 9(7), pages 406-416, July.
    3. Theophillus Rufus Akintoye, Aguguom & Oyesola Salawu, Rafiu, 2018. "Earnings Quality And Firms Financial Performance: A Missing Link In The Listed Firms In Nigeria," International Journal of Contemporary Accounting Issues-IJCAI (formerly International Journal of Accounting & Finance IJAF), The Institute of Chartered Accountants of Nigeria (ICAN), vol. 7(2), pages 32-54, December.
    4. Muhammad Bilal Saeed & Syed Kashif Saeed, 2018. "Corporate Governance and Accounting Conservatism: Moderating role of Audit Quality and Disclosure Quality," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 10(2), pages 123-150, June.
    5. Sattar Khan & Yasir Kamal & Shahid Hussain & Muhammad Abbas, 2022. "Corporate governance looking back to look forward in Pakistan: a review, synthesis and future research agenda," Future Business Journal, Springer, vol. 8(1), pages 1-32, December.
    6. Imad Rahim & Attaullah Shah, 2019. "Corporate Financing and Firm Efficiency: A Data Envelopment Analysis Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 58(1), pages 1-25.
    7. Fares Alsufy & Malik Abu Afifa & Mohammed Zakaria Soda, 2020. "Mediating Effects of Liquidity in the Relationship between Earnings Quality and Market Value of the Share Price: Evidence from Jordan," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 19(1), pages 17-32, June.
    8. Sabo Mohammed & Junaidu Muhammad Kurawa, 2021. "Board Attributes and Value of Listed Insurance Companies in Nigeria: The Mediating effect of Earnings Quality," International Journal of Management Science and Business Administration, Inovatus Services Ltd., vol. 8(1), pages 7-23, November.
    9. Malik Abu Afifa & Fares Alsufy & Ahmad Abdallah, 2020. "Direct and Mediated Associations among Audit Quality, Earnings Quality, and Share Price: The Case of Jordan," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 500-516.

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