ROLE OF CORPORATE GOVERNANCE IN IMPLEMENTING IFRS IN LISTED COMPANIES OF PAKISTAN

In the partial Fulfillment for the Degree of BS (Hons)

LAHORE SCHOOL OF ACCOUNTANCY & FINANCE

THE UNIVERSITY OF LAHORE

(2013)

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The University of Lahore

Lahore School of Accountancy & Finance

Supervisory Committee We the Supervisory Committee, certify that the contents and the form of thesis submitted by ( ) have been found satisfactory and recommend it for the evaluation of the External Examiner for the award of degree of BS (Hons) (Discipline).

Supervisor

Co-Supervisor

Member

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The University of Lahore

Lahore School of Accountancy & Finance

Examination Committee

The Thesis viva of _____________ was held on ----------------------------- at the Lahore School of Accountancy & Finance, The University of Lahore. The Supervisory and Examination Committee gave satisfactory remarks on the thesis and viva and were approved for the award of the degree of BS (Hons) (Discipline).

_______________ External Examiner

______________ Internal Examiner

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The University of Lahore

Lahore School of Accountancy & Finance

Undertaking I ___________, Registration No: _____________ declare that the contents of my thesis entitled Role of Corporate Governance in Implementing IFRS on Listed Companies of Pakistan are based on my own research findings and have not been taken from any other work expect the references and has not been published before. I also undertake that I will be responsible for any plagerization in this thesis.

Students Name

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The University of Lahore

Lahore School of Accountancy & Finance

Plagiarism evaluation report

This is to certify that I have examined the Turnitin report of the thesis entitled Role of Corporate Governance in Implementing IFRS on Listed Companies of Pakistan. The thesis contains no text that can be regarded as plagiarism. The overall similarity index obtained from the Turnitin software is ___%.

Supervisor

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Dedication

To Whom the World Owes its Existence Hazrat Muhammad (P.B.U.H)

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Acknowledgement
First of all I like to thank to my GOD who has complete knowledge and guide me in every field of life and enabled me to complete my theses. I like to pay respect to the university which has provided me with such opportunity to be a part of this institution. I am heartily thankful to me supervisor _____________________ whose encouragement, guidance and support from the beginning to the final level help me to develop an understanding of the subject. Thanks to all Thesis Committee who taught me that how to design my theses. They inspired me and support me throughout the work. I am greatly thankful to my family: my parents who supported me throughout my life. Also special thank to my friends for their support and help in completing this theses. Lastly, I prefer my regards and blessings to all of those who supported me in any respect during the completion of the project.

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Abstract
This paper investigates that there is a relationship among the corporate governance mechanism and the earning quality of the company. The aim of the research was to find out the relation of corporate governance mechanisms like, board size, board independence, gender diversity on the board, absence of chief executive officer as chairman or vice chairman and presence of audit committee and its independence upon the earning quality of the company. The researcher has identified the governance mechanism as the independent variable and the earning quality as a dependent variable. A survey was conducted by the researcher within the limited time frame. Then the data collected from the survey was interpreted with the help of multiple regressions in SPSS statistical software. The finding of the research shows very significant and positive relations between corporate governance mechanism and companys earnings

performance.

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Table Of Contents
Chapter No: 1.............................................................................................. 10 Introduction ............................................................................................. 10 Chapter No: 2.............................................................................................. 14 Literature Review..................................................................................... 14 Chapter No: 3.............................................................................................. 23 Methodology ........................................................................................... 23 3.1 Theoretical framework.................................................................... 23 3.2 Hypotheses ..................................................................................... 26 3.3 Research design .............................................................................. 27 Chapter No: 4.............................................................................................. 30 Analysis of data........................................................................................ 30 Chapter No: 5.............................................................................................. 38 CONCLUSION ........................................................................................... 38 5.1 Recommendations .......................................................................... 39 References .................................................................................................. 40 Appendix:.................................................................................................... 43 Tables: ..................................................................................................... 43 Survey ...................................................................................................... 50

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Chapter No: 1 Introduction

After the revelations of the big corporate scandals played by the multinational companies in early 2000's.A lot of work is done in the field of corporate governance practices. These set of rules were introduced to enhance the check processes on the public listed companies reporting and disclosures. Corporate governance mechanism is a system which is applied by the management of the company for better supervision, control and effectiveness of financial reporting standards in the company. In Pakistan a large amount of work is done in the field of corporate governance with the increase of people attraction towards the investment point of view. In this study I am searching out a relation between the adoption of the corporate governance mechanism and the enhancement in the earning quality of the company. The reason to select this topic is to promote the practices of code of corporate governances within the companies to create confidence in investors and also to enhance earning quality of the companies with better practices of the code. Researcher wants to find out the role of corporate governance in the implementation of accounting standards and for this purpose. He finds the relationship between adopting governance mechanism and the earning quality of the company. The purpose of my research is to see the impact of adopting corporate governance mechanism on the earning quality of the company. This strategy is applied only to view the perception of different people working in the company at different levels about corporate governance and does it enhances earning quality of the company. When the survey is conducted different types of opinions were collected by me. Then I have interpreted their opinions with the help of multiple regressions in SPSS statistical software and the conclusion on which I have reached is
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that adopting corporate governance mechanism shows significant relation in enhances the earning quality in terms of high company performance, better financial ratios and increase in shareholders wealth. The main users of this research study are the existing and the potential investors of the company. Better compliance with the code of corporate governance builds confidence among the shareholders or the investors of the company. In Pakistan these practices of corporate governance are supervised by the security exchange commission of Pakistan in the all listed companies in Pakistan. All the companies which are listed have to publish the statement of compliance with the code of corporate governance to show its compliance with rules regulated by the security exchange commission of Pakistan. This compliance statement builds confidence among the investors of the company that their rights are protected and no one is snatching his money from him. Another important work performed by the corporate governance structures is to reduce agency costs and enhance the earnings quality and the reporting. There are different types of corporate governance mechanism which are widely used in all the companies listed in Pakistan. Some of them are like; board size in which we see the number of board of directors appoints by the investors of the company to handle the day to day operation of the company. They are responsible for all the decision made by the company and their sole duty is to oversight the controls that are applied within the company and increases shareholders wealth. Another important factor in corporate governance mechanism is that board independence which means what is the percentage of non-executive directors in the composition of the board. The main reason of it to check the authority that the director posses within the company and to protect the rights of the shareholders. So the people who are charged with governance within the company do not manipulate the earnings for
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their personal interests. Formation of the audit committee is the system introduced by the corporate governance structure to ensure the quality of financial reporting and disclosures made by the company. It comprises of the non-executive directors only and the head of that committee is the independent director. The duty of the audit committee is to oversight the internal controls design by the management of the company and to facilitate the external auditor during the statutory audit of the company. Corporate governance mechanisms promote the treatment of equality with the shareholders. To protect their investment these set of monitory rules applied on the management of the company. So they will understand their responsibilities towards the company and also towards the shareholders who has given them their investments to run the company. Corporate governance also describes the rules and eligibility criteria for those persons as well who are appointed by the shareholders to handle the management of the company. This is to ensure that a competent person is handling the matters and making decisions rationally to increase the companys performance and to maximize shareholders wealth. Corporate governance emphasis on the transparency of the data and require proper disclosures for the work done. It shows that the management of the company is not hiding anything from the owners of the company or if anyone among the management of the company tries to manipulate the earnings will be caught. Institutional investors mean other companies which are investing into our company like insurance companies, mutual funds and so on. It is difficult to measure the governance practices in numeric terms that are why the researcher has conducted a survey regarding good corporate governance practices and its relation with earning performance of the company. The time frame was limited although the results which have been obtained from the interpretation of the survey are
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realistic according to the resources that the researcher have while conducting the research. The researcher has achieved his objectives which show a positive and significant relationship between adopting governance mechanism and earning quality of the company.

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Chapter No: 2 Literature Review

Man and Wong (2013) had studied the effect of corporate governance in eliminating or reducing the earning management extent. They used Anglo-American system to check the effectiveness of corporate governance system. They have viewed different corporate governance mechanisms. As a result negative relation with the earning management is found. The earning quality can be enhanced if the directors are independent and have sound knowledge in the perspective of finance which will provide incremental control effects on earning management. Audit committees can oversee the internal controls of the company for better check and balance on the financial statements for the assurance of the quality. Shiri, Vaghfi, Soltani, and Esmaeli (2012) stated that the earning qualities can be enhanced by reducing the managerial conflicts among the managers and the investors. This is an inductive study thats why past and historical financial information is utilized. The quality is tested by increasing the number of independent directors. They tested this assumption through regression analysis which is aided by the SPSS statistical analysis software. Then the outcome was that external corporate governance mechanism is resulted in enhances the earning quality with the help of more independent directors in the board and they will reduced the conflicts arising among the management and the investors and also accrual quality is enhanced by it. Hili and Affes (2012) have empirically tested the impact of gender diversity on the board of directors effect on the earning quality. This research was conducted on the French companies. These authors used Arellano and bond autocorrelation test to examine
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GMM.

After the analysis of SBF 120 index they have found out that there is no

significant change in the performance of the company with homogeneous (all men) board in respect to heterogeneous (men and women) board. But this study opens a door of further research that what is the impact of heterogeneous boards and its implementations on the performance of the company. Uadiale (2012) studied the role of board composition and audit committee on the earning management in Nigeria. They used survey research method on listed companies of Nigeria. So they suggest that the board of the company must contain a reasonable number of independent directors and the audit committee members must have a consistent level of financial background, then the earning management likelihood can be reduced. In recent years a large amount of attention is given to the earning management of the company because they are linked to financial statements which are being reported. These reported statements build the confidence of the investor in the company. Bistrova and Lace (2012) wanted to search out the relation of weak corporate governance mechanisms with low earning quality in central and eastern European countries. They use the regression and the quartile analysis to verify the variables and the result was a negative relation among low corporate governance practices and poor earning quality. They have linked the cash flow with the accruals to find it. It seems that the investors of central and eastern European countries can invest in public listed companies without any hesitation because the corporate governance level of those companies is high. So the chances of manipulations in earnings are quite obsolete. Sirat (2012) investigates the impact of firm size, in the corporate governance practices on the earning management. They have selected a population size of whole manufacturing sector listed in Indonesia stock exchange consisting of 157 units. They have selected 117 units on basis of progress and analyze their data for 5 years from 2002Page 15

7. The sample if it is a conglomerate company or not. A survey was conducted of the literature books. Multiple regressions were used to analyze the influence of corporate governance on the magnitude of earning management. The result was if the size of the company is huge then the earning will be smaller. The earning management of the company is better if its family owned then normal structure of the company. So company size proves negative effect on the earning management of the company. Abed, Al-Attar, and Suwaidan (2012) studied the impact of corporate governance mechanism on the earning qualities for Jordanian firms 2006-9. They conducted this research on the companies which are being listed in Amman Stock Exchange. They used the multiple OLS regression analysis with the help of SPSS version 17. The findings show no significant relation among the corporate governance mechanism and earning management except the board size. The number of board of members must not be huge so that the earning management can be reduced by management size. Dichev, Graham, Harvey, and Rajgopal (2012) find out some things which describe the earning qualities variations through large survey and conducting interviews of the people charge with governance. High qualities of earnings are backed by actual cash flows. Earning quality is also driver by discretionary factors as well. Earning manipulations are inevitable when the controls in the company are more effective. The half of the earning qualities is determined by business model, macroeconomics factors. Athanasakou and Olsson (2012) search out the two different perspective of corporate governance first, the impact of innate earning quality with the practices of corporate governance and secondly, the impact of environment of the company performance. They use different measures like, accrual quality, absolute abnormal accruals and earning variability to interpret the data. The result they have find out that there is a positive relation between the both perspectives of corporate governance.
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Accrual diversity has positive effect on the performance of the company. This also shows a positive relation among the environment and the performance of the companies like motivation and rewards enhance the performance of the employee which ultimately enhance the earning quality or the performance of the company. Campa and Donnelly (2011) investigated the impact of corporate governance on the earning quality in the legal context. They have compared two legal corporate contexts. One of them is Italy and the other one is UK. In result they have found out that where the legal context of the country is weak the corporate governance plays a major role in the enhancement of the earning quality. Government needs to formulate new policies through which a better control can be established over the earning qualities. Sun, Liu, and Lan (2011) investigated if there any difference in the earning management quality if the head of department is a female. They have observed a company for five years but as a result they find no association among this gender discrimination in the corporate sector. There is no change in earning qualities if the head of the department is a female but the environment is quite pleasant than usual. Moradi and Nezami (2011) studied the effect of ownership centralization and institutional ownership with the earning quality. They have conducted research on companies listed in Tehran stock exchange. The authors have applied Linear regression and correlation analysis, Fisher test and t-testate to test their hypotheses. In general the result shows positive relation among ownership centralization and institutional ownership but this relation is not significant enough or in other words the companies listed in Tehran stock exchange are less affected with this in measuring earning quality. Wang and Gulzar (2011) investigated the impact of corporate governance practices in reducing earning management in shanghai and Shenzhen stock exchange, china. They applied correlation and regression analysis on the governance practices of the
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firms listed in these stock exchanges. The outcome of their research was a negative relationship is established between earning management and corporate governance characteristics like number of board of directors, their duality, their sex, and their ownership structure in china. We also find that the concentrated ownership reduces discretional current accruals by preventing opportunistic mangers behavior. This research has broadened the scope of earning management and corporate governance characteristics especially for china because in china no one has conducted such type of research before. Liang and Shan (2011) investigated the impact of IFRS mandatory adoption on the quality of earnings and if the effectiveness of the corporate governance mechanism can be used as a proxy in determining the quality of the earnings. They compare the accrual quality of before and after mandatory adoption of IFRS in two countries of Europe specifically UK and Germany. The results show the enhancement in the quality of the earning in post mandatory adoption of the IFRS and the adoption of corporate mechanisms shows positive relation with earning quality of the firm. Houqe, Zijl, Dunstan, and Karim (2010) tested that the IFRS adoption does not increase the earning quality of the company but if the investors protection regime is strong then the IFRS enhances the quality of the earnings in the company. This study is conducted with the reference of cross- section among different countries. They have conducted research on UK and German based companies. The result show positive relation among the investors protection regime and the quality of earning in the company. This result might be different under different investor protection regime policies applicable in different countries. CHEN and LIU (2010) had investigated the impact of changes in the best corporate governance practice principle on the earning quality in the emerging markets. They use regression analysis among pre and post CGBPP to test their hypothesis. The
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outcome of their research was that the independence of corporate boards enhance the management opportunistic earnings because in the absence of the independent board the earning management of the company in emerging markets and in opportunities reduces because if, the check and balance on the monitory system is reduced. Then the board can manipulate earnings and show biasness in decision making. Almeida, Lima, and Lima (2010) wanted to find out the performance of the Brazilian listed companies to get listed in the New York stock exchange. They used correlation and regression analysis among the companies listed in Brazilian and New York stock exchanges. The evidence from the finding was that good corporate practices are required to enhance the earning quality of the Brazilian firm to get listed in the New York stock exchange. Leuz (2010) describes the reliability of earning quality in different legal context with in different countries legal systems. The outcome of his research was different countries have different legal requirements to fulfill the principles of corporate governance to enhance earning quality. If there is any difference in convergence of these regulatory principles then IFRS adoption will be utilized as a benchmark. Sivaramakrishnan and Yu (2008) used the Gompers index as a tool to measure the strength of corporate governance, investigate whether accrual quality and governance structure effect the earning quality of the firm. The outcome of the result was that, if the corporate governance is high, then earnings quality is enhanced. Good governance provides high quality of accruals diversity which ultimately enhances the earning quality and increases the quality earning predictability of the firm. Javed, Iqbal, and Hasan (2006) find out the relation of corporate governance practices with firm performance in Karachi stock exchange listed companies. A very low work is done in this field in Karachi stock exchange. They used Tobin Q, CGI and other
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control variables to construct a model and take average of these three years 2003-5. The result was there was a positive relation among in firm level governance practices with the performance of the company. They also find out that only relaying on the corporate governance practices disclose in the annual reports are not enough to evaluate the reliability of the firm performance or earning quality. Strict rules should be regulated by the Karachi Stock Exchange to enhance the performance of the companies which are being listed in it. C and Vera-Muoz (2005) studied the tremendous change brought recently in the corporate governance practices, where the roles and responsibilities of the audit committee members and the board of directors were redefined to improve the quality of earnings and reporting within the firm. The findings were that, the duties of the audit committee members were enhanced because they have to monitor the controls applied by the management over the financial statements. If the members of the audit committee are not competent enough then there will be chance of manipulations in the controls due to which the reliability of the quality of earnings will be affected. The members of the audit committee are independent from the management because their independence increases the credibility of the financial reporting. Chen, Elder, and Hsieh (2005) investigated the impact of corporate governance practices on the Taiwan listed companies. They want to find out the impact of voluntary creation of independent directors on the earning quality. They use the regression model to test the relation of corporate governance to earning management. The outcome of the research concludes a negative relation among the number of independent directors and the likelihood of earning quality. Our study also demonstrate the voluntarily adoption of best corporate governance practice principles might enhance the effectiveness of independent directors in constraining earning management in Taiwanese listed companies.
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Easley and OHara (2004) investigated that, the firms in which the executives and the managers owned the stocks of the company. They tried to enhance the earning quality of the firm by any means necessary. They also concluded that irrespective of how you understand the governance mechanisms. It will reduce the information asymmetry and enhance the reporting quality of the firm. In result better financial reporting enhances earning quality as well. By doing this the firm information becomes more reliable and proves to be useful in creating confidence among the investors. Investors feel safe due to the quality of information which is provided to them. Ismail (2002) investigated the relation between the earning quality and the corporate practices after the implementation of the Malaysian code 2001. The findings of the research were that, the number of members in the board and in the audit committee show positive relation with the earning quality. If the number of members in the board and in audit committee is higher then, they can perform their duties more efficiently and in result to which earning qualities were enhanced. The result also defines that the companies with concentrated ownership like (family owned) have low earning quality then the firms which do not have concentrated ownership. Lang, Becke, and Blan (2002) studied the opportunity for the investors in current situation. The result was that to promote the investors confidence we need to enhance the corporate governance practices. These rules are regulated by the stock exchange to promote investors confidence. When these rules are strictly monitored then the performance of the firm increases so as the earning quality Rehman and Ali (2001) investigated that the earning management can easily be manipulated by the firms with in the applicable financial reporting framework within the firm. So there is a need to establish the best practices of the corporate governance. So, that the firm cannot manipulate the adoption choices which are provided by the
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international financial reporting standards for better presentation. These corporate governance practices will enhance the earning management of the firm. Bebchuk and Roe (1999) investigates the impact of different economies on the corporate structure of the firms which will affect its earning management. The findings were the economies of some countries promote the corporate structure to be family owned or institutional owned. Such kind of corporate structure is efficient but if there is an involvement of the independent members in the structure then the reliability on the quality of earning and reporting can be enhanced further. Yermack (1996) investigated that, the efficiency of the companies with small board size is more effective than others. The researcher proposed that, if the board size is small and only competent persons are members of such board then, they can work more efficiently and due to small board size the earning management will be enhanced. Another very important characteristic of corporate governance is that the chair person and the chief executive officer must be two different persons to avoid the concentration of power in one hand which can lead the company into the conflict of interest and reduces earning quality. Cheng (1996) demonstrated the existence of this link between the quality of earnings and the information content of earnings. They found that the permanent accounting earnings are less informative in relation to future earnings and cash flows. Earning qualities are more reliable when the opportunistic behavior of the managers is monitored by the control system of the company. In other words monitoring attributes have the capacity to improve the earning qualities. So, effective internal control system can play a role in the enhancement of the earning qualities as well.

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Chapter No: 3 Methodology 3.1 Theoretical framework

Research on corporate governance is increasing due to large financial crisis in past few decades. The dependent variable of interest in this research is earning quality. I attempt to explain the variance in this dependent variable by six independent variable (1) percentage of non-executive directors members, (2) absence of CEO as chairman or vice chairman, (3) percentage of institutional investors (4) Audit committee size (5) Board size (6) Gender diversity in composition of board. In my view these variables can explain the earning quality better because on these variables I can measure the impact of corporate governance mechanisms adopted by the company. The non-executive directors are the ones appointed in the composition of the board to exercise the rights of the board members. They dont have any kind of financial or personal interest in the earnings of the company. They are elected on the board on check the independence of the board of directors in decision making and to protect the rights of the shareholders. Absence of CEO as chairman, CEO is the chief executive officer of the company he is the one who is authorized to signed the agreements on the behalf of the company. He makes the decisions of the company rather chairman is one who is the head of the board of directors. He is responsible to conduct meetings of the board and to communicate the agenda with the board members. Chairman is responsible to lead the discussion in the board meeting. He must remain neutral in the discussion to conclude the decision. Percentage of institutional investors shows how much people are pooling wealth into the company. If large number of people is putting their wealth then
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they want to influence their decisions in the company which can affect the decision making of authorize people or can create biasness among them. Audit committee is formed to oversight the financial reporting of the company and the process of disclosures. The members appointed in the audit committee are from the board of directors and a separate chairman is also appointed for the audit committee. Audit committee also ensures the compliance of the company with rules and regulations, ethics and with all statutory requirements. Gender diversity means the percentage of male and female on the composition of the board and their impact on the earning quality of the company.

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Symmetric Diagram
Independent Variable Dependent Variable

The numbers non-executive directors play an important role in the earning quality of the company. Thats why non-executive directors are hired on the composition of the board to maintain the check and balance on the performance of the company. These independent members over sight the methods used by the management of the company in reporting. These non-executive directors are appointed to protect the right of share holders. CEO of the company is most important person in any structure of the company. He is the person who binds the company in different types of agreements. The final decisions are taken by this person in the company. He handles all the operations of the company. If he is not the chairman of the board then, it might happen that there been a rise of conflict among the CEO and the chairman of the company. If the chairman concludes the session of the board meeting and the CEO doesnt agree with him then
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there will a conflict. The earning quality is affected due to this reason. (Uadaile, 2012) said board composition and the independence of audit committee play significant role in the earning quality. The percentage of institutional investors plays a very important role in the earning quality of the company. If the percentage of investors is high then they want voting rights or to oversight the decisions which were taken by the management. This will affect the managements capabilities of doing the work according to prescribed principles. The investors influence for greater return can affect the earning quality of the company. Audit committee oversight the reporting quality and the disclosures made by the management of the company which will ultimately affect the earning quality of the company.(Affes,2012) said that gender diversity has significant relation with the earning quality. If the percentage of non-executive directors on the board is high then the earning quality will be enhanced in terms of performance of the company. Better corporate governance practices will results in better performance in the company and enhance earning quality.

3.2 Hypotheses
H1: there is a significant relationship exists between adopting governance mechanism and enhancing earning quality. H0: there is no significant relationship exists between adopting governance mechanism and enhancing earning quality.

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3.3 Research design 3.3.1 Problem to be investigated

In this research the problem which was investigated was the impact of adopting governance mechanism on enhancing earning quality. This study is very important because these set of governance rules and regulations which are imposed on the listed companies are to enhance the transparency and disclosures quality of the company. This will result in enhancing the earning quality of the company. This research is important because some people thought that applying governance practices in the company is only the waste of time and resources and it does not help in enhancing any kind of companys performance. The main users of this research will be the investors because good governance practices create confidence among the investors of the company and enhance company earning quality.

3.1.2 Scope of Study

This is a qualitative study thats why questionnaires were made keeping in view the independent variables and the dependent variables of the study. This study was conducted through the survey which was conducted from different corporations to test the relationship among the governance practices and earning quality. The research is realistic and its practically applicable in industries. Good governance adoption enhances the economic growth as well with companys earning quality. Governance plays an important role in building confidence among the investors of the company. Thats why a lot of importance is given to governance practices now-a-days within the listed companies in Pakistan. This study helps the potential investors of the company to gain confidence on

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the companys in which they have invested and due to increase of performance in the company they can expect larger returns as well.

3.1.3 Sources of data

The required information for this research paper is gathered from following two sources: I have studied different literature and go through the history of research studies, by means of studies in library (including books, articles, journals and academic discussions) is used and foreign research papers and theses are also used in this study work which has been received via the internet service. The data calculated from the survey for the study of variables like (percentage of nonexecutive directors, absence of CEO as a chairman or vice chairman, size of audit committee the percentage of the institutional investors, gender diversity in board composition and earning quality) are required to test the assumptions made.

3.1.4 Relevance of data

The data which was collected from the survey is relevant because it provide sufficient information regarding the variables which I have selected to find the relation among the governance and the earning quality. The study is applicable and is conducted within a specific time frame. The data is reliable because the survey is conducted within the corporations and its findings justify the variables of concern.

3.1.5 Model of study

To interpret the results conducted from the survey multiple regressions is used. Multiple regressions are the best model to show the relation between the independent and

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the dependent variables in the study. This model provides me with best results of the impact of governance mechanism on earning quality.

Following regression equation is formed to explain the impact of governance mechanism on earning quality. EQ=0+1CEO+2IND+3AUD+4SIZE+5GEN+6INV

EQ= Earning Quality CEO= Absence of chief executive officer as chairman IND= Board independence AUD= Audit committee size SIZE= Board size GEN= Gender diversity INV= Percentage of institutional investors 0 = constant 1,2,3,4,5,6 = Coefficients

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Chapter No: 4 Analysis of data

Here is the interpretation of the results of SPSS.

Model Summaryb Std. Change Statistics

Error of R R Model R 1 Adjusted the Square F Sig. F Durbin-

Square R Square Estimate Change Change df1 df2 Change Watson .867 .26950 .956 10.744 6 3 .039 1.689

.978a .956

a. Predictors: (Constant), does gender diversity affect earning quality of the company, does board size of the company enhance earning quality, percentage of institutional investors affect earning quality, absence of chief executive officer as a chairman affect earning quality, board independence enhances the earning quality, audit committee size affect the earning quality of the company

b. Dependent Variable: Earning Quality This model summary describes the goodness of the model. R square represents the effect of independent variable upon the dependent variable. Adjusted R square represents the impact of dependent variable on the independent variable. The range of the value of the R square and the adjusted R square lies between 0 and 1. If it shows value nearer to 1 than it represents a good model exist. If it shows value nearer to 0 than it
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represents the model that exists is bad. The outcome of my result of R square and the adjusted R square is 0.956 and 0.867 which shows a good model exists. It means under R square the value 0.956 shows change in dependent variable which is earning quality due to change in independent variable that was governance mechanism. The value of adjusted R square will be lower than value of R square or it might be equal to it. The value of adjusted R square can only be higher than the value of R square in one condition and that is if I added some extra variables in the analysis of data. But in our data the value of adjusted R square is lower than R square with means my data is good no extra variables were utilized in the analysis of data. Standard error of estimation shows the reliability of the data that is interpreted in the SPSS. If the value of standard estimation of data is below 1 than it represents the data is reliable. In the model summary the value of standard error is 0.26950 which is lower than 1. So it shows reliability of the data.

ANOVAb Model 1 Regression Residual Total Sum of Squares df 4.682 .218 4.900 6 3 9 Mean Square .780 .073 F 10.744 Sig. .039a

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a. Predictors: (Constant), does gender diversity affect earning quality of the company, does board size of the company enhance earning quality, percentage of institutional investors affect earning quality, absence of chief executive officer as a chairman affect earning quality, board independence enhances the earning quality, audit committee size affect the earning quality of the company b. Dependent Variable: Earning Quality This anova table represents the measure of variance among the variable of the data. This table measures the difference between the variables so that relationship can be measured. In anova table the value of sig or P value must be lower than 0.05 then it represents that the data is significant. The outcome of data is 0.039 which is lower than 0.05 which shows that model is significant and is accept as well. When the value of sig or P value is lower than 0.05 then we reject the assumption of the null hypothesis another aspect to see the significance of data is F value. If the F value in the annova table is greater than 4 than data is significant. The results show 10.744 hence another proof of significance.

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Coefficientsa
95% Unstandardized Standardized Coefficients Std. Model 1 (Constant) B Error Beta t Coefficients Confidence Interval for B Correlations Lower Upper ZeroSig. Bound Bound order Partial Part Tolerance VIF Collinearity Statistics

-.564 1.141

-.494 .655 -4.196 3.068

board

independence -.061 -.371 .735 -.467 .370 .131 -.209 -.045 .552 1.810

enhances the earning -.049 .132 quality audit committee size

affect the earning -.866 .199 -1.166 4.342 quality of the company percentage of .183 .501 2.471 .090 -.131 1.037 .000 .819 .301 .360 2.779 .023 -1.500 -.231 -.318 -.929 -.529 .205 4.869

institutional investors .453 affect earning quality absence of ceo as a chairman earning quality does board size of the company earning quality does gender diversity affect earing quality of .763 the company a. Dependent Variable: Earning Quality enhance .377 affect .455

.172

.436

2.639 .078 -.094 1.003 .106 .836

.321 .544

1.839

.222

.403

1.701 .187 -.328 1.082 -.229 .701

.207 .264

3.784

.109

1.138

6.973 .006 .415

1.111 .561 .971

.849 .556

1.797

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Earning Quality and Board independence: Regression Equation EQ=0+2IND EQ= -0.564-0.49IND This equation shows that if 1 unit of board independence is changed it will bring 0.49 decreases in earning quality. So a negative relation exists between these two variables. Standard Error If the value of standard error is below than 0.5 than the results are significant otherwise they are insignificant. My standard error for this variable is 0.132 which means the results are significant. T test If the value of t test is greater than 2 than it means the model is significant or vice versa. The T value for this variable is 0.371 which means the model is insignificant.

Earning Quality with Audit committee size Regression Equation EQ=0+3AUD EQ= -0.564-0.866AUD This equation shows that if the size of the audit committee changes by 1 unit it will decrease the earning quality by 0.866. It shows negative relation exist between these two variables.

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Standard Error If the value of standard error is below than 0.5 than the results are significant otherwise they are insignificant. The result for this variable shows the value of 0.199 which means the results are significant. T test If the value of t test is greater than 2 than it means the model is significant or vice versa. The T value for this variable is 4.342 which mean the model is significant.

Earning Quality with Percentage of institutional investors Regression Equation EQ=0+6INV EQ= -0.564+0.453INV This equation shows that if percentage of institutional investors changes by 1 unit it will increase the earning quality by 0.453. It shows positive relation exists between these two variables. Standard Error If the value of standard error is below than 0.5 than the results are significant otherwise they are insignificant. The result for this variable shows the value of 0.183 which means the results are significant. T test If the value of t test is greater than 2 than it means the model is significant or vice versa. The T value for this variable is 2.471 which mean the model is significant. Earning Quality with Absence of the CEO as a chairman

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Regression Equation EQ= 0+1CEO EQ= -0.564+0.455CEO This equation shows that if any changes come in the absence of chief executive officer as the chairman by 1 unit it will increase the earning quality by 0.455. It shows positive relation exists between these two variables. Standard Error If the value of standard error is below than 0.5 than the results are significant otherwise they are insignificant. The result for this variable shows the value of 0.172 which means the results are significant. T test If the value of t test is greater than 2 than it means the model is significant or vice versa. The T value for this variable is 2.639 which mean the model is significant.

Earning Quality with Board Size Regression Equation EQ= 0+4SIZE EQ=-0.564+0.377SIZE This equation shows that if the board size of the company changes by 1 unit it will increase the earning quality by 0.377. It shows positive relation exists between these two variables. Standard Error If the value of standard error is below than 0.5 than the results are significant otherwise they are insignificant. The result for this variable shows the value of 0.222 which means the results are significant.
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T test If the value of t test is greater than 2 than it means the model is significant or vice versa. The T value for this variable is 1.701 which means the model is insignificant.

Earning Quality with Gender Diversity Regression Analysis EQ=0+5GEN EQ=-0.564+0.763GEN This equation shows that if the gender diversity on the composition of the board changes by 1 unit it will increase the earning quality by 0.763. It shows positive relation exists between these two variables. Standard Error If the value of standard error is below than 0.5 than the results are significant otherwise they are insignificant. The result for this variable shows the value of 0.109 which means the results are significant. T test If the value of t test is greater than 2 than it means the model is significant or vice versa. The T value for this variable is 6.973 which mean the model is significant.

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Chapter No: 5 CONCLUSION

This study finds out the relation between the adoption of corporate governance mechanism and earning quality. After the detailed study a survey was conducted and the data collected through that survey is entered into the SPSS and the results were obtained. These results show different levels of significant of earning quality the dependent variable with the different independent variables in the data. The results show positive and significant relation exists among the adopting corporate governance mechanism and enhancing earning quality. Multiple regression analysis is used to find out the impact that the governance practices have on enhancing earning quality. The analysis found that board independence has negative relation with the earning quality of the data which means 1 unit change in board independence decreases earning quality by 0.49. The value of standard error shows significant relation exists among them and T value shows the model is insignificant. The analysis found that audit committee size has negative relation with the earning quality which means 1 unit change in audit committee size decreases the earning quality by 0.866. The value of standard error shows significant relation exists among them and T value shows the model is significant. The analysis found that percentage of institutional investors has positive relation with the earning quality which means 1 unit change in percentage of investors increases the earning quality by 0.453. The value of standard error shows significant relation exists among them and T value shows the model is significant.

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The analysis found that absence of chief executive officer as chairman has positive relation with the earning quality which means 1 unit change in absence of chief executive officer as chairman increases the earning quality by 0.455. The value of standard error shows significant relation exists among them and T value shows the model is significant. The analysis found that board size has positive relation with the earning quality which means 1 unit change in board size of the company increases the earning quality by 0.377. The value of standard error shows significant relation exists among them and T value shows the model is insignificant. The analysis found that gender diversity among board composition has positive relation with the earning quality which means 1 unit change gender diversity among board composition increases the earning quality by 0.763. The value of standard error shows significant relation exists among them and T value shows the model is significant. The value of R square shows the significance of the whole model. My result shows 0.956 which is closer to 1. It means my model as a whole is significant. I have rejected the null hypothesis because my F value is greater than 4. Finally the overall conclusion on the analysis is that corporate governance mechanisms have significant relation in enhancing the earning quality.

5.1 Recommendations
Governance mechanism should also be adopted by unlisted companies. Concentrated ownerships enhance the earning quality. Companies should use different types of approaches towards adopting governance mechanism to enhance earning quality.

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References

Abed, S., Al-Attar, A., and Suwaidan, M. (2012;). Corporate Governance and Earnings Management: Jordanian Evidence;. International Business Research; , 216-225;. Almeida, J. E., Lima, G. A., and Lima, I. S. (2010;). CORPORATE GOVERNANCE AND ADR EFFECTS ON EARNINGS QUALITY IN THE BRAZILIAN CAPITAL MARKETS;. jounal of business and management; , 260-272;. Athanasakou, V., and Olsson, P. (2012;). Earnings Quality, Corporate Governance, and Earnings Quality;. Journal of London School of Economics; , 241-283;. Bebchuk, L. A., and Roe, M. J. (1999;). A Theory of Path Dependence in Corporate Ownership and Governance;. Stanford Law Review; , 127-170;. Bistrova, J., and Lace, N. (2012;). QUALITY OF CORPORATE GOVERNANCE SYSTEM AND QUALITY OF REPORTED EARNINGS: EVIDENCE FROM CEE COMPANIES;. Journal of ECONOMICS AND MANAGEMENT; , 55-61. C, S., and Vera-Muoz. (2005;). Corporate Governance Reforms: Redefined Expectations of Audit Committee Responsibilities and Effectiveness;. Journal of Business Ethics; , 115-127;. Campa, D., and Donnelly, R. (2011;). The Impact of Corporate Governance and the Adoption of IFRS on Earnings Quality in Different Legal Jurisdictions: a Comparison between Italy and the UK;. University College Cork journals; , 377-399;. CHEN, K. Y., and LIU, J.-L. (2010;). EARNINGS MANAGEMENT,CEO

DOMINATION,AND GROWTH OPPORTUNITIES;. International Journal of Public Information Systems; , 43-69;.

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Chen, K. Y., Elder, R. J., and Hsieh, Y.-M. (2005;). Corporate Governance and Earnings Management: The Implications of Corporate Governance Best-Practice Principles for Taiwanese Listed Companies;. journal of business and administration; , 315-360;. Dichev, I., Graham, J., Harvey, C. R., and Rajgopal, S. (2012;). Earnings Quality: Evidence from the Field;. Journal of Business and Management; , 126-200;. Hili, W., and Affes, P. H. (2012;). Corporate Boards Gender Diversity and Earnings Persistence: The Case of French;. Global Journal of Management and Business Research; , 51-59;. Houqe, M. N., Zijl, P. T., Dunstan, P. K., and Karim, D. W. (2010;). The effect of IFRS Adoption and Investor Protection on Earnings Quality around the World;.

http://ssrn.com/abstract=1536460; . Javed, A. Y., Iqbal, R., and Hasan, L. (2006;). Corporate Governance and Firm Performance: Evidence from Karachi Stock Exchange;. Pakistan Institute of Development Economics; (pp. 947-964;). Islamabad;: Pakistan Institute of Development Economics;. Lang, R. T., Becke, B. C., and Blan, R. D. (2002;). Special Study on Market Structure, Listing Standards and Corporate Governance;. American Bar Association; (pp. 14871567;). New York;: American Bar Association;. Leuz, C. (2010;). Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why;. Accounting and Business Research; , 345-410;. Liang, J., and Shan, Y. G. (2011;). Do Corporate Governance Mechanisms Impact on Earnings Quality? Evidence from IFRS Adoption in the UK and Germany;. Journal of Business and Management; , 125-165;. Man, C.-k., and Wong, B. (2013;). Corporate Governance And Earnings Management: A Survey Of Literature;. The Journal of Applied Business Research; , 391-418;.

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Moradi, M. A., and Nezami, A. (2011;). Influence of Ownership Structure on Earning Quality in the Listed Firms of Tehran Stock Exchange;. International Journal of Business Administration; , 146-154. Shiri, M. M., Vaghfi, e. H., Soltani, J., and Esmaeli, M. (2012; ). Corporate Governance and Earning Quality: Evidence from Iran; . Middle-East Journal of Scientific Research; , 702-708;. Sirat, H. (2012;). CORPORATE GOVERNANCE PRACTICES, SHARE OWNERSHIP STRUCTURE, AND SIZE ON EARNING MANAGEMENT;. Journal of Economics, Business, and Accountancy Ventura; , 145-156;. Special Study on Market Structure, Listing Standards and Corporate Governance;. (2002;). American Bar Association; (pp. 1487-1567;). New York;: American Bar Association;. Sun, j., Liu, G., and Lan, G. (2011;). Does Female Directorship on Independent Audit Committees Constrain Earnings Management;. Journal of Business Ethics; , 369-382;. Uadiale, O. M. (2012;). Earnings Management and Corporate Governance in Nigeria;. Research Journal of Finance and Accounting; , 311-325. Wang, Z., and Gulzar, M. A. (2011;). Corporate Governance Characteristics and Earnings Management: Empirical Evidence from Chinese Listed Firms;. International Journal of Accounting and Financial Reporting; , 133-151

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Appendix: Tables:
Descriptive Statistics Mean Earning Quality board independence enhances the earning quality audit committee size affect the earning quality of the company percentage of institutional investors affect earning quality absence of ceo as a chairman affect earning quality does board size of the company enhance earning quality does gender diversity affect earing quality of the company 4.1000 4.2000 Std. Deviation .73786 .91894 N 10 10

4.1000

.99443

10

4.0000

.81650

10

4.5000

.70711

10

4.2000

.78881

10

3.9000

1.10050

10

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Correlations does audit committee percentage of absence does gender

of ceo as board size diversity a of the affect earing

size affect institutional board independence Earning Quality Pearson Correlation Earning Quality board independence enhances the earning quality audit committee size affect the earning quality of the company percentage of institutional investors affect earning quality absence of ceo as a chairman affect earning quality does board size of the company enhance earning quality -.229 .552 .538 -.173 .106 .342 -.237 -.192 .000 -.148 .547 1.000 -.318 .219 1.000 .547 .131 1.000 .219 -.148 1.000 enhances the the earning quality of the investors affect earning quality .000

chairman company affect earning quality .106

enhance quality of earning quality -.229 the company .561

earning quality company .131 -.318

.342

.552

.132

-.237

.538

.416

-.192

-.173

.247

1.000

.199

-.500

.199

1.000

.026

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does gender diversity affect earing quality of the company .561 .132 .416 .247 -.500 .026 1.000

Sig. (1-tailed) Earning Quality board independence enhances the earning quality audit committee size affect the earning quality of the company percentage of institutional investors affect earning quality absence of ceo as a chairman affect earning quality does board size of the company enhance earning quality does gender diversity affect earing quality of the company N Earning Quality board independence enhances the earning quality

.359

.185

.500

.385

.262

.046

.359

.272

.342

.167

.049

.358

.185

.272

.051

.255

.054

.116

.500

.342

.051

.297

.317

.245

.385

.167

.255

.297

.291

.071

.262

.049

.054

.317

.291

.472

.046

.358

.116

.245

.071

.472

10

10

10

10

10

10

10

10

10

10

10

10

10

10

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audit committee size affect the earning quality of the company percentage of institutional investors affect earning quality absence of ceo as a chairman affect earning quality does board size of the company enhance earning quality does gender diversity affect earing quality of the company 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Variables Entered/Removedb Model 1 Variables Entered does gender diversity affect earing quality of the company, does board size of the company enhance earning quality, percentage of institutional investors affect earning quality, absence of ceo as a chairman affect earning quality, board independence enhances the earning quality, audit committee size affect the earning quality of the companya a. All requested variables entered. b. Dependent Variable: Earning Quality . Enter Variables Removed Method

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Coefficient Correlationsa does gender diversity affect earing quality of the Model 1 Correlations does gender diversity affect earing quality of the company does board size of the company enhance earning quality percentage of institutional investors affect earning quality absence of ceo as a chairman affect earning quality board independence enhances the earning quality -.367 -.369 .002 -.385 1.000 .078 .452 -.183 -.198 1.000 -.385 .252 .098 .645 1.000 -.198 .002 -.774 .258 1.000 .645 -.183 -.369 -.784 1.000 .258 .098 .452 -.367 -.301 company does board percentage of absence of ceo as a board audit committee size affect

size of the institutional company enhance earning quality investors affect earning quality

chairman independence the earning affect earning quality enhances the earning quality quality of the company

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audit committee size affect the earning quality of the company

-.301

-.784

-.774

.252

.078

1.000

Covariances does gender diversity affect earing quality of the company does board size of the company enhance earning quality percentage of institutional investors affect earning quality absence of ceo as a chairman affect earning quality board independence enhances the earning quality audit committee size affect the earning quality of the company a. Dependent Variable: Earning Quality -.007 -.035 -.028 .009 .002 .040 -.005 -.011 4.293E-5 -.009 .017 .002 .009 -.007 -.006 .030 -.009 .009 .002 .026 .034 -.006 4.293E-5 -.028 .006 .049 .026 -.007 -.011 -.035 .012 .006 .002 .009 -.005 -.007

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Collinearity Diagnosticsa Variance Proportions audit committee percentage absence size affect board the of institutional does board does gender

of ceo as size of diversity a the affect

independence earning enhances the quality of Condition Model Dimension Eigenvalue 1 1 2 3 4 5 6 7 6.813 .080 .046 .036 .016 .006 .003 Index 1.000 9.209 12.234 13.751 20.650 34.951 47.212 (Constant) .00 .00 .00 .01 .04 .27 .68 earning quality .00 .03 .10 .00 .75 .04 .08 the company .00 .01 .00 .12 .00 .27 .59

investors chairman company earing affect earning quality .00 .01 .13 .00 .11 .12 .63 affect earning quality .00 .04 .01 .04 .03 .85 .03 enhance quality earning of the

quality company .00 .01 .01 .05 .09 .15 .70 .00 .19 .19 .15 .06 .16 .25

a. Dependent Variable: Earning Quality

Residuals Statisticsa Minimum Predicted Value Residual Std. Predicted Value Std. Residual a. Dependent Variable: Earning Quality 3.1241 -.22159 -1.353 -.822 Maximum 5.2216 .24732 1.555 .918 Mean 4.1000 .00000 .000 .000 Std. Deviation .72127 .15560 1.000 .577 N 10 10 10 10

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Survey

Survey for adopting governance mechanism enhancing earning quality Name:______________________________ Date:_______________________ 1. Governance mechanism has significant impact on enhancing earning quality. Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

2. Absence of CEO as the chairman of the board is significant in enhancing earning quality. Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

3. Large number of board of directors is significant in enhancing earning quality. Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

4. Non-executives directors reduce managerial conflicts among the management and investors to enhance earning quality. Strongly Disagree Disagree Agree Strongly Agree Neither agree or disagree

5. Audit committee size is significant in enhancing earning quality. Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

6. The number of non-executive members in the board enhances control on earning management. Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

7. Non-executive directors in board composition shows significant relationship with Earning quality Page 50

Strongly Disagree

Disagree

Agree

Strongly Agree

Neither agree or disagree

8. Gender diversity among the board members affects the performance of the company. Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

9. If the firm size is larger than it is difficult to apply corporate governance mechanisms to enhance companys efficiency. Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

10. If the CEOs holding is increasing in the company will it affect the companys performance? Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

11. If the percentage of institutional investors is high will it affect the earning performance of the company? Strongly Disagree Disagree Agree Strongly Agree Neither agree or disagree

12. Does large board size composition reduces earning management in the company? Strongly Disagree Agree Strongly Agree Neither agree or Disagree disagree

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