42 2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
Nexus be ween co po a e go e nance
and ea nings managemen in amily
and non- amily i ms
Aziza Naz1, Monika Naďo á K ošláko á2, Iq a Fa heen3,
Ma ián Č i ik4, Anna Michálko á5
1 Bahauddin Zaka iya Uni e si y, Facul y o Comme ce, Law and Business, Ins i u e o Managemen Sciences,
Pakis an, ORCID: 0000-0002-6834-1501, [email p o ec ed];
2 Uni e si y o Economics in B a isla a, Facul y o Comme ce, Depa men o Tou ism, Slo akia, ORCID: 0000-0003-
0518-9538, [email p o ec ed] (co esponding au ho );
3 The Islamia Uni e si y o Bahawalpu , Facul y o Managemen Sciences and Comme ce, Ins i u e o Business,
Managemen & Adminis a i e Sciences, Pakis an, ORCID: 0000-0002-1907-2157, [email p o ec ed];
4 Uni e si y o Economics in B a isla a, Facul y o Comme ce, Depa men o Ma ke ing, Slo akia, ORCID: 0000-0003-
4701-1543, [email p o ec ed];
5 Uni e si y o Economics in B a isla a, Facul y o Comme ce, Depa men o Tou ism, Slo akia, ORCID: 0000-0002-
9084-4930, [email p o ec ed].
Abs ac : This s udy explo es he ela ionship be ween in e nal co po a e go e nance mechanism and
acc uals and eal ea nings managemen (EM), ollowing Pakis an’s 2012 amended Code o Co po a e
Go e nance. I also examines he mode a ing ole o amily i ms on he ela ionship among co po a e
go e nance mechanisms and acc uals and eal ea nings managemen . Fo his pu pose, we used
a sample o 172 i ms lis ed on he Pakis an S ock Exchange (PSX) o 2012–2019. The dependen
a iables we e es ima ed by u ilizing he gene alized me hod o momen s (GMM), ixed andom
e ec s and mode a ion analysis we e es ima ed h ough S a a. Hausman speci ica ion es was
used o choose among andom and ixed e ec s. Resul s epo ha boa d size showed a signi ican
posi i e impac on abno mal disc e iona y expenses and o e all eal ea nings managemen . Boa d
independence led o a subs an ial and nega i e impac wi h acc uals EM. Manage s o amily-
owned i ms a e also oppo unis ically al e ing he epo ed ea nings. Resul s illus a e o he use s
o inancial s a emen s ha he eliabili y o inancial in o ma ion depends on he e ec i eness o
co po a e go e nance. Also, highligh he e iciency o moni o y mechanisms and sugges ha boa d
independence is one o he p ac ical app oaches o an eme ging ma ke o es ain he EM p ac ices.
Findings a e help ul o egula o s, policymake s, and in es o s o egula e and make policies o
imp o e he inancial epo ing quali y in Pakis an. As pe he au ho s’ knowledge, his s udy adds
he no el y by ocusing on wo c i ical in e nal moni o ing mechanisms (boa d independence and
boa d size) in mi iga ing ea nings managemen , ollowing he 2012 amended Code o Co po a e
Go e nance in Pakis an. I will add uniqueness by s udying he mode a ing ole o amily owne ship,
as he li e a u e is sca ce. The indings o his s udy highligh ed he impac o he in e nal moni o ing
mechanisms on ea ning managemen p ac ices in Pakis an.
Keywo ds: Acc uals ea nings managemen , boa d independence, co po a e go e nance code,
dynamic panel da a, amily owne ship, eal ea nings managemen , Pakis an.
JEL Classi ica ion: G32, L60, M20.
APA S yle Ci a ion: Naz, A., Naďo á K ošláko á, M., Fa heen, I., Č i ik, M., & Michálko á, A.
(2023). Nexus be ween co po a e go e nance and ea nings managemen in amily and non-
amily i ms. E&M Economics and Managemen , 26(2), 42–57. h ps://doi.o g/10.15240/
ul/001/2023-2-003
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43
2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
In oduc ion
Ea nings managemen has aised global con-
ce n due o i s de imen al in luence on inan-
cial epo ing and, consequen ly, on inancial
ma ke s a e inancial scandals like En on, and
Wo ldCom. Ea nings a e a c i ical measu e o
a business’s pe o mance and a e hus c ucial
o inancial s a emen use s (Jiang & Kim, 2020;
Li e al., 2022, Rankin e al., 2017). Unde his
pe spec i e, i is equen ly in he bes in e es s
o business owne s and manage s o manipu-
la e epo ed ea nings o pe sonal gain (Chan
e al., 2020; Habib e al., 2017). Manipula ion
o epo ed ea nings ei he wi hin GAAP p in-
ciples o ou side leads o inapp op ia e in o ma-
ion abou he i m (Rahman & Mohamed Ali,
2006). The inancial epo ing anspa ency
may be mi iga ed by inco po a ing moni o ing
mechanisms like Co po a e Go e nance (CG;
Abu A i a e al., 2022; Feng & Huang, 2020;
Shlei e & Vishny, 1997).
Pa e (2000) demons a ed ha manage s
al e epo ed ea nings by u ilizing accoun ing
lexibili y o p ac ices o policies. The e o e,
hese inancial scandals ha e es ablished une h-
ical beha iou and ealized a need o accoun -
abili y and anspa ency in epo ed ea nings
(Ala eeni, 2018; Jennings, 2012). Connec ed
o his, he laws obse ed in such inancial
scandals esul ed in wo ldwide enhanced ecog-
ni ion and signi icance ega ding accoun abili y,
consis ency and anspa ency (Ahmad-Zaluki
& Wan-Hussin, 2010; Sheha a, 2015). This
phenomenon is also ue o Pakis an’s ma ke
scandals like Islamic In es men Bank, a i-
ous Housing Coope a i e Socie ies, Taj Com-
pany, Meh an bank, KASB bank, and EXACT
(Kie nan, 2005). Mos o he i ms belong o
he amily business o Pakis an (Khan, 2018).
Coun y in es o p o ec ion le el also de e -
mines he le el o epo ing quali y. Pakis an
has an unde de eloped capi al ma ke , weak in-
es o p o ec ion, low anspa ency, and a lack
o necessa y olun a y disclosu e s anda ds
(A shad & Ja id, 2014; Jadoon e al., 2021).
The e o e, unde lines a di e need o s udy
he inancial epo ing quali y o Pakis ani i ms.
An ex ensi e li e a u e documen s he moni-
o ing ole o in e nal CG mechanisms in imp o -
ing inancial epo ing quali y. Hence, based
on he agency heo y, his a icle in es iga es
he ela ionship be ween CG and ea nings
managemen by ocusing on he moni o ing
unc ion o wo in eg al in e nal mechanisms,
pa icula ly, boa d independence and he boa d
o di ec o s (Al-Haddad & Whi ing on, 2019;
Jensen & Meckling, 1976). Also, s udies based
on US and UK da a show good CG can mini-
mize ea nings manipula ion (Klein, 2002; Peas-
nell e al., 2005). Following his, we in es iga e
whe he Uni ed S a es and Uni ed Kingdom ind-
ings hold o Pakis ani i ms, ex ending esea ch
by examining whe he boa d independence
also assis s in mi iga ing EM p ac ices. Hence,
he objec i es o his s udy a e many old. Fi s ly,
o explo e he ela ionship be ween acc uals
and eal ea nings managemen and he inde-
pendence o co po a e boa ds in Pakis an-lis ed
i ms. Secondly, o s udy he nexus be ween ac-
c uals and eal ea nings managemen and non-
execu i e di ec o s. Addi ionally, o in es iga e
he in e ac ion e ec o amily i ms in EM and
boa d independence ela ionship.
Following p io s udies, his s udy uses wo
ypes o ea nings managemen , i.e., acc uals
(AEM) and eal (REM). We es ima e he AEM
om he Ko ha i e al. (2005) model and REM
om he Roychowdhu y (2006) model ollowing
he Al-Haddad and Whi ing on (2019), as well
as Shah e al. (2020). The sys em and he di -
e ence gene alized me hods o momen s ha e
es ima ed AEM and REM esiduals. In summa-
y, boa d size showed a signi ican posi i e ela-
ion wi h AEM and REM. Secondly, a signi ican
posi i e associa ion was ound by he p esence
o non-execu i e di ec o s on he boa d. Thi dly,
one o he e icien moni o ing mechanisms o
mi iga e ea nings managemen was boa d inde-
pendence. Finally, when we use o e all REM,
Pakis ani i ms we e posi i ely associa ed wi h
one o he o he o achie e a ge ea nings.
The indings o his s udy ex end he exis -
ing li e a u e in EM and CG in di e en ways.
The p e ious li e a u e has no clea ela ionship
be ween boa d independence and EM. The e-
o e, his s udy will explo e he ela ion by ana-
lysing mo e comp ehensi e p oxies o boa d
independence and ea nings managemen o
ad ance his subjec a ea’s indings because
he pas s udies examine his ela ionship ei he
h ough AEM o REM. To he bes o ou knowl-
edge, his is he i s s udy o conside bo h
p oxies wi h an addi ional one, i.e., REM-all,
by agg ega ing he h ee ypes o REM in one
s udy. The p esen s udy will also con ibu e o
he li e a u e by illing he gap iden i ied by (Al-
heb i e al., 2021; Massis & Foss, 2018; Kuma
& Za oni, 2018) o conside he mode a ion
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44 2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
ac o s a ec ing boa ds o di ec o s’ unc ions.
Iden ically, he unique ea u e o amily-owned
i ms is “he e ogenei y,” as amily i ms go e n
mos o he wo ld’s businesses.
The same is ue o Pakis ani i ms. Fa mi-
ly business s a egic decisions a e al oge he
di e en om non- amily i ms. When amily and
business in e ace wi h each o he , i b ings
“ amiliness” o he businesses, b inging unique
esou ces and ocus on inancial and non-
inancial pe o mance ou comes (Fe amosca
& Alleg ini, 2018; Gómez-Mejía e al., 2007;
Ma in e al., 2016). In a si ua ion o low inan-
cial pe o mance, he amily i m’s consis ency
indica es ha hey ca e no only abou mon-
e a y p o i s bu also abou non- inancial p o i s,
including he sa is ac ion o he need o belong-
ings, he p ese a ion o amily dynas y ac oss
gene a ions, and he main enance o good ep-
u a ion, among o he s (El-Chaa ani & El-Abiad,
2017, 2019). Family business esea ch has
shi ed om agency o a socioemo ional weal h
model (El-Chaa ani, 2013; Gomez-Mejia e al.,
2014). So, his s udy will also add li e a u e in
he con ex o a amily i m’s decision-making.
Fu he mo e, in he con ex o an eme ging
na ion, i.e., Pakis an, his is he i s s udy o
explo e he e ec o boa d independence on
es ic ing he REM and AEM a e in oducing
he 2012 code o CG in Pakis an.
The emainde o he pape is sec ion 2,
li e a u e e iew, sec ion 3, esea ch design,
sec ion 4 esul s and discussions, and sec ion 5
conclusion.
1. Theo e ical backg ound
P e ious li e a u e no ably classi ies ea nings
managemen in o wo. One is acc uals EM
used o ade ac ual economic pe o mance
by making Gene ally Accep ed Accoun ing
P inciples (GAAP; Dechow & Skinne , 2000).
Acco ding o Healy and Palepu (2001), hese
include he change in accoun ing policy, i.e., de-
p ecia ion me hods, de e ed axa ion, ai
alue measu emen , goodwill impai men s, e c.
In con as , eal ea nings managemen is
he ope a ional manipula ions by manage s in-
s ead o a change in accoun ing policy. Ope a-
ional manipula ions include he shi in iming
o s uc u ing o ansac ions, esou ce alloca-
ion, and in es men decisions o change ongo-
ing yea ea nings (Dechow & Skinne , 2000;
Roychowdhu y, 2006). G aham e al. (2005)
su ey illus a es ha manage s we e emp ed
o manage REM a e he Sa banes-Oxley Ac
in 2002. REM p o ides less chance o iden i y
p ice discoun s o change sales s a egy by au-
di o s o egula o s as AEM does.
A he same ime, AEM alone does no ul il
he ea nings a ge gap (Roychowdhu y, 2006;
Shah e al., 2020). Co po a e go e nance is
one o he moni o ing mechanisms ha help
in p o iding inancial epo ing quali y. Along
wi h he alignmen e ec , his mechanism
lowe s he agency cos and possible agency
p oblems among inside s and sha eholde s
(Demse z & Lehn, 1985). The boa d o di-
ec o s is he i al in e nal mechanism o CG
ha ensu es he smoo h p ocess o inancial
epo ing quali y. Co po a e boa ds moni o all
he business ac i i ies, aligning sha eholde s’
in e es s wi h in e nal managemen , esul ing
in less manage ial oppo unism (Liu & Fong,
2010). Li e a u e also inds co po a e boa ds’
e ec i e moni o ing machine y which helps
in educing agency p oblems be ween manag-
e s and sha eholde s (Fama & Jensen, 1983;
Jensen & Meckling, 1976).
This s udy also applied bibliog aphic ana lysis
o keywo ds. The analysis elies on he 998 a -
icles. The da a was ex ac ed om he Web o
Sciences (WOS) due o i s abili y o he da a
om a b oade pe cep i e o in o ma ion his
pla o m o e s (Zhao e al., 2019) acco ding
o hei pa icula disciplines (Hosseini e al.,
2018). Following he Web o Sciences is
he pla o m widely ecognized by se e al
au ho s o exis ing e iew scien me ic da a
echniques; we u ilize da a ex ac ion based
on he keywo ds co-occu ence and co-ci a ion
analysis (Chen, 2017).
We employed a VOS iewe o map he li -
e a u e ma ix based on he keywo ds due o
in e es (Yahaya e al., 2020). P e iously, his
so wa e has also been u ilized o pe o m i s
powe ul abili y o cons uc a isualiza ion
map based on he links and he h eshold o
he objec o bibliome ic analysis in many s ud-
ies (Kha ib e al., 2021; Zheng & Kouwenbe g,
2019). This s udy pe o ms science mapping by
ocusing on he cen al opic hemes comp ising
o 998 pape s based on he ollowing keywo ds:
“ea ning managemen ,” “acc ual ea nings man-
agemen ,” “ eal ea nings managemen ,” “Co -
po a e Go e nance,” and “ amily i ms.” These
keywo ds ei he de ec ed in i le o abs ac
wi hin he sea ch ba que y we e selec ed om
he Web o Science da abase, anging om
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45
2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
2016–2021 o he 67 a icles we e d opped due
o no mee ing he co-occu ence h eshold.
1.1 Boa d size
I is he con ic ion in he li e a u e ha boa d size
also impac s he inancial epo ing quali y. Con-
sis en wi h agency heo y, la ge boa ds ha e
mo e expe ise, social esou ces, di e si y, and
ime o moni o managemen decisions (Dal on
e al., 1998). Hence, he e is a nega i e ela-
ion be ween boa d size and EM. P e ious li -
e a u e indings a e inconclusi e ega ding EM.
Fo ins ance, Abu A i a e al. (2022) and Ghosh
e al. (2010) epo ha la ge boa ds mi iga e
EM p ac ices. Gi haiga e al. (2022) as well
as Sa ka e al. (2008) conclude he opposi e.
Whe eas, boa d size was signi ican ly nega i e
when using he REM p oxy (Kang & Kim, 2012).
Talbi e al. (2015) epo a posi i e ela ionship
wi h boa d size. Abdel e al. (2016) and Jamalu-
din e al. (2015) epo no associa ion be ween
boa d size and EM. This s udy ocuses on
boa d independence’s moni o ing ole, as la ge
boa ds ha e mo e independen di ec o s wi h
added moni o ing capaci y. So, embedded
in agency heo y, we hypo hesized ha :
H1a: The e is a signi ican nega i e ela ion
be ween boa d size and AEM.
H1b: The e is a signi ican nega i e ela ion
be ween boa d size and REM.
1.2 Non-execu i e di ec o s
Acco ding o agency heo y, non-execu i e
di ec o s (NED) a e he ou side di ec o s on
he boa d who a e equi ed o moni o and
con ol he oppo unis ic beha iou o execu i e
di ec o s (Jensen & Meckling, 1976). In en-
hancing boa d e ec i eness, NED ac s as
a check and balance mechanism. As oo ed
in hei equi y slice and s emming s aigh om
he di ec o s’ chai , hey ha e mo e oppo uni-
ies o con ol and go h ough a mul i ace ed
web o incen i es (Mangel & Singh, 1993). Ac-
co ding o Fama and Jensen (1983), NED plays
a moni o ing ole in managemen pe o mance
and s a egic decisions. Being ou side s, NED
is an addi ional sou ce o he i m as hey ac
as decision expe s. No only because o hei
expe ise bu also hei p o essional epu a-
ion (Pea ce & Zah a, 1992; Weisbach, 1988)
a gue ha as NED a e independen o manage-
men and CEO in luence, hey ac as a posi-
i e in luence o e di ec o s’ decisions. Also,
assis in mi iga ing manage ial consump ion
o pe quisi es (Gi haiga e al., 2022). Hence,
we hypo hesized ha :
H2a: The e is a signi ican ly nega i e ela-
ion be ween non-execu i e di ec o s and AEM.
H2b: The e is a signi ican nega i e ela ion
be ween non-execu i e di ec o s and REM.
1.3 Boa d independence
In li e a u e, boa d independence is an e ec i e
GC mechanism o moni o ing and es aining
EM p ac ices. Fama (1980) as well as Fama
and Jensen (1983) documen ha he p es-
ence o independen di ec o s (IDs) ac s as
a con ol mechanism and helps in imp o ing
he e ec i eness o he boa d. IDs ha e s ong
incen i es o ac as compe en moni o s. Inde-
penden di ec o s ha e mo i a ions o cul i a e
epu a ions as specialis s in decision-making
and moni o ing, gaining expe ise by wo k-
ing on a manage ial posi ion ou side he i ms
(Fama & Jensen, 1983) a i m by Gi hagia e al.
(2022) and Goel and Kapoo (2022) s udy. To
he bes o he au ho s’ knowledge, only one
s udy Nazi (2015) s udied boa d independence
wi h AEM and REM p oxies in he Pakis ani
con ex . The e o e, his s udy will ill his gap by
examining he ela ionship be ween wo p oxies
o boa d independence wi h AEM and REM.
We pos ula e he hypo heses as:
H3a: The e is a signi ican ela ion be ween
Boa d independence and AEM.
H3b: The e is a signi ican ela ion be ween
Boa d independence and REM.
2. Resea ch me hodology
2.1 Sample and da a selec ion
The sample is Pakis ani i ms lis ed on
he Pakis an S ock Exchange (PSX) o 2010
o 2019. Da a on boa d independence, REM,
AEM, and amily/non- amily a iables a e pe -
sonally adminis a ed om he i m’s annual
epo s publicly a ailable on PSX (www.psx.
com.pk), indica ing he da e o acquisi ion o
he da a and espec i e i ms’ websi es. Da a
on he sha e p ice has been collec ed om
he S ock Indices websi e (www.in es ing.
com). The Secu i ies and Exchange Commis-
sion issues he CG code o egula e he lis ed
i ms in Pakis an. The i s code o CG was
en o ced in 2002, amended in 2012, and hen
in 2017. In Ap il 2012, SECP inco po a ed h ee
in oduc o y clauses and included nine e i-
sions in he p e ious code. In addi ion, lis ed
i ms mus appoin an independen di ec o ,
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46 2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
which was op ional in he las code. This s udy
chooses 2012 as he base yea . As REM mod-
els equi e wo lag yea da a, we also included
wo yea s o da a be o e 2012.
2.2 Resea ch app oach and demog aphics
In his s udy, ollowing Bisogno and Dona ella
(2022), we use he deduc i e app oach o ind
he answe o ou esea ch ques ion and quan-
i a i e me hod o analysis he da a. The sample
is d awn om a popula ion o 530 lis ed i ms
on he S ock Exchange o Pakis an (www.
psx.com.pk). D opping missing and una ail-
able da a, we le wi h wi h 32% o he sample.
Ini ially, he s udy a emp ed o include all
he lis ed manu ac u ing i ms. In nex s ep,
his s udy excludes inancial i ms because o
hei egula o y na u e, unique capi al s uc u e,
and accoun ing me hods (Asgha e al., 2020).
Da a missing o a yea om he s udy pe iod o
discon inued ope a ions ha e been elimina ed,
lea ing a 32% sample o he o al popula ion
wi h 1,376 obse a ions o e eigh yea s.
2.3 Va iable desc ip ion and me hodology,
dependen a iables
A lis o a iables wi h abb e ia ions is p e-
sen ed in Tab. 1.
This s udy uses he Ko ha i e al. (2005)
model o p oxy o AEM and Roychowdhu y
(2006) model as a REM p oxy.
Acc uals ea nings managemen
This s udy uses abno mal ope a ing acc uals as
a p oxy o AEM. The no mal acc uals a e he ac-
ual i ms’ condi ion and sales g ow h which
manage s canno manipula e. In compa ison,
abno mal (disc e iona y) esul s om manage ial
disc e ion in o he inancial epo ing p ocess.
Hence, we use he Ko ha i e al. (2005) model
o pe o mance-ma ched disc e iona y acc uals
de eloped ini ially by Jones (1991).
Acco ding o Ko ha i e al. (2005), poo
pe o mance i ms engaged mo e in ea nings
managemen ac i i ies, so hey inco po a e
one pe o mance measu e, i.e., e u n on as-
se (ROA), in he acc uals model and ela e
he acc uals wi h ROA in poo ly pe o ming
i ms. Ko ha i e al. (2005) model is:
TAi,  /Ai, –1 = β0 + β1(1 /Ai, –1) +
+ β2 (∆REVi, – RECi,  /Ai, –1) +
+ β3(PPEi, /Ai, –1 ) + β4 (ROAi,  ) + ε i,
(1)
Va iable Symbol De ini ion
Co po a e go e nance a iables
To al di ec o s TD To al numbe o di ec o s on he boa d
Non-execu i e di ec o s NED Ra io o non-execu i e di ec o s o he o al numbe o di ec o s
Boa d independence BI Independen di ec o s o he o al numbe o di ec o s
Con ol a iables
Long e m deb a io LTDR Ra io o long- e m deb o o al asse s
ROA ROA P o i a e ax/ o al asse s
Tobin’s Q TQ (Ma ke capi aliza ion + book alue o o al liabili ies)/book
alue o o al asse s
Ma ke capi aliza ion – A e age s ock’s uppe and lowe p ice/2, mul iplied by he o al
numbe o ou s anding sha es
Fi m size FS Na u al log o o al asse s
In e ac ion e m
Family owne ship FO Dummy a iable (one i manage s hold 5% o common s ock,
ze o o he wise)
Sou ce: own
Tab. 1: Va iable desc ip ion
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47
2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
whe e: TAi, – o al acc uals de ined as ea nings
be o e ex a-o dina y i ems minus cash low om
ope a ions o i m i a yea ; Ai, –1 – o al asse s
o i m i a yea ; ∆REVi, – change in sales e -
enue o i m i a yea , ∆RECi, – change in i m’s
accoun s ecei ables i a ime ; PPEi, – g oss
alue o plan , p ope y, and equipmen o
i m i a yea ; ROAi, – p o i a e ax di ided
by o al asse s; εi, – unspeci ied andom e o s.
We es ima ed he esiduals o he equa ion
and called hem abno mal disc e iona y acc u-
als. This s udy uses s anda dized esiduals as
a p oxy o disc e iona y acc uals.
Real ea nings managemen
Following p io s udies, we use h ee models
o REM (based on manage ial manipula ions
in ope a ional ac i i ies), de eloped by Dechow
e al. (1998) and applied by Roychowdhu y
(2006). These ac i i ies include:
 Sales-based manipula ion – by accele a ing
he imings o sales, gi ing p ice discoun s,
o o e ing mo e lenien c edi e ms, all a
he expense o cash low om ope a ions;
 Disc e iona y expenses manipula ion – e-
duc ion in disc e iona y expendi u es, such
as cu ing he esea ch and de elopmen
(R&D), ad e ising, selling, and adminis a -
ing (SG&A) unds; lowe ing disc e iona y
expenses in a pa icula yea will aise
epo ed ea nings espec i e yea ;
 P oduc ion cos manipula ions – p odu-
cing mo e uni s o lowe he o al cos o
goods sold, which leads o an inc ease in
he p o i ma gin (o e -p oduc ion o epo
a d op in COGS).
Acco ding o Roychowdhu y (2006), lenien
c edi e ms and discoun s a e used o upli
sales in he cu en pe iod, which esul s in
a d op in sales in he subsequen yea , accom-
panied by educed p o i ma gins and highe
p oduc ion cos s. Hence, we assume an ab-
no mally low ope a ing cash low (AbCFO) in
he cu en pe iod because o sales manipula-
ion. A nega i e alue signals manipula ion
in cash low om ope a ions. Con a y o his,
manage s manage ea nings upwa d by p o-
ducing mo e uni s o epo a high ope a ional
ma gin, esul ing in a highe alue o abno mal
p oduc ion cos . AbP od wi h a posi i e sign
in e p e s as a signal o REM.
Finally, o mee ea nings a ge s, manage s
may educe R&D, selling, gene al and ad-
minis a i e expenses as hese expenses a e
expensed in he same pe iod as hey incu ed.
So, we expec a lowe abno mal disc e iona y
expenses alue. A alue wi h a nega i e sign
is in e p e ed as e idence o abno mal disc e-
iona y ea nings managemen . The ou ine
business ope a ional ac i i ies a e no mal cash
low om he ope a ion, no mal disc e iona y
expenses, and no mal p oduc ion cos s. In con-
as , abno mal cash low om he ope a ion,
abno mal disc e iona y expenses, and abno -
mal p oduc ion cos s a e he es ima ed alues
om models. Residuals, he di e ence be ween
no mal and abno mal, a e he p oxies used
o ea nings managemen in u he analysis.
All hese models a e es ima ed o each i m
and each yea . REM (abno mal p oduc ion
cos , abno mal ope a ing cash low, abno mal
disc e iona y expense) models a e as below.
PROD  ⁄A –1
= α0 + α1
(
1⁄A –1
)
+
+ α2
(
S  ⁄A –1
)
+ α3
(
△S ⁄A –1
)
+
+ α4
(
△S –1⁄A –1
)
+ ε i,
(2)
CFO  ⁄A –1 = α0 + α1
(
1⁄A –1
)
+
+ α2
(
S ⁄A –1
)
+ α3
(
△S ⁄A –1
)
+ ε i, (3)
DisExp  ⁄A –1 = α0 + α1
(
1⁄A –1
)
+
+ β1
(
S –1⁄A –1
)
+ ε i, (4)
△INV⁄A –1 = α0 + α1
(
1⁄A –1
)
+
+ α2
(
△S ⁄A –1
)
+ α3
(
△S –1⁄A –1
)
+ ε i,
(5)
COGS ⁄A –1 = α0 + α1
(
1⁄A –1
)
+
+ β1
(
S ⁄A –1
)
+ ε i, (6)
whe e: P od – esiduals om Equa ion (1–2);
S – cu en yea sales; △S – change in sales
om he cu en – p e ious yea (1s lag o
sales a iable); △S –1 – change in [p e ious
yea sales – p e ious yea (2nd lag o sales
a iable)]; CFO – cash low om ope a ions;
DisExp – esea ch & de elopmen + ad e is-
ing + selling, gene al and adminis a i e ex-
pense; COGS – cos o goods sold.
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48 2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
This s udy p edic s all ou ea nings
managemen models using “A ellano-Bo e /
Blundell-Bond linea dynamic panel da a es i-
ma ion.” G eene (2000) ad oca es ha es ima-
ion models comp ising mul iple lags, especially
in dependen a iables, may lead o au oco -
ela ion be ween lagged endogenous a iables
and esiduals when es ima ed h ough simple
eg ession. Hence, he esul s ob ained migh
be biased and inconsis en . Boujelben and Fed-
hila (2011) main ained using he A ellano-Bo e /
Blundell-Bond linea dynamic panel da a es ima-
ion, an es ima ion p ocedu e wi h sys em GMM
(gene alized momen s o me hods). The e o e,
his s udy uses dynamic panel es ima es.
The di e enced GMM es ima o p oposed by
A ellano and Bond (1991) and Sys em GMM
model is gi en by Blundell and Bond (1998).
Gene alized momen s o me hods (GMM) use
an ins umen al a iable o esol e endogenei y,
measu emen e o s, and he e ogenei y issues.
Following Nazi and A za (2018), his s udy
uses he lagged di e ence o he dependen
a iable as an ins umen al a iable. Residu-
als ob ained om sys em and di e ence GMM
used as disc e iona y, abno mal p oduc ion,
abno mal cash low om ope a ions, abno mal
disc e iona y ea nings managemen p oxies
in u he analysis.
Following Al-Haddad and Whi ing on (2019)
and Shah e al. (2020) abno mal cash lows om
ope a ions and abno mal disc e iona y expens-
es a e mul iplied by −1 o in e p e he same
as abno mal p oduc ion cos and disc e iona y
acc uals. The e o e, a highe alue indica es
a highe p obabili y o changing ope a ional
decisions o inc ease e enue. All ea nings
managemen a iables a e s anda dized and
winso ized a he 1s and 99 h le els.
Fu he mo e, we cons uc an agg ega e
eal managemen p oxy by combining esidu-
als o all h ee models. Following Alhadab and
Nguyen (2018), we in e p e REM_all as
he highe he REM_all alue, he la ge he im-
plied use o REM. REM_all is as ollows:
REM_all = (−abno mal cash lows om op-
e a ions + abno mal p oduc ion cos − abno -
mal disc e iona y expenses).
2.4 Mode a o
Family owne ship is aken as a dummy a i-
able, one i i is amily owned and ze o o he -
wise. Consis en wi h Po a e al. (1999), we
de ine amily owne ship as i ms o manage s
ha ing 5% common s ock. In ou sample, am-
ily owne ship a ies om a minimum o ze o
o a maximum o 72%, indica ing ha mos o
he i ms lis ed on PSX a e unde amily con ol.
These esul s a e consis en wi h he indings
o p e ious s udies in de eloping coun ies
(Hi an i hiko n & Joemsi ip ase , 2019; To-
masko a e al., 2021), whe e a la ge numbe o
amily-owned i ms exis .
3. Resea ch esul s and discussion
3.1 Summa y s a is ics
Tab. 2 shows he summa y s a is ics o dependen ,
independen , and con ol a iables. A e age mean
o o al di ec o s was 8 wi h a s anda d de ia ion
o 1.1842 wi h boa d independence o 13.6259
means ha co po a e boa ds in Pakis an ha e
a lowe p opo ion o independence o ex e nal
moni o ing. The mean alue o non-execu i e
and independen di ec o s is 4% and 1%, which
Va iable Obse a ion Mean S d. de . Minimum Maximum
Co po a e go e nance a iables
TD
1,376
7.7798 1.1842 6.0000 14.0000
NED 4.5603 1.3357 1.0000 9.0000
BI 0.1683 0.0795 0.0700 0.7100
Ea nings managemen a iables
AEM
1,376
0.9157 0.9894 0.0019 3.1408
AbCFO 2.8207 0.8906 1.5931 3.3101
AbP od −0.6980 1.3216 −3.6500 0.5061
AbDisc −0.0920 0.0464 −0.1730 −0.0270
Tab. 2: Summa y s a is ics – Pa 1
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2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
means ha he e a e ou non-execu i e di ec o s
on a e age, and one independen di ec o is p es-
en on each i m’s boa d.
AbCFO showed a mean alue o 2.8207 while
AbP od −0.6985 and AbDisc −0.0924. Re u n
on asse s showed a alue o 0.0357. ROA and
TQ led o a alue o 0.0357 and 12.5703,
e ealing he undamen al posi ion o he p o i -
able i ms in accoun ing measu es. In e ms
o he ma ke -based pe o mance measu es,
i.e., TQ indica es ha in es o s a e hinking
posi i ely and placing a highe alue on he book
asse s o i ms. The a e age size o sample
i ms is 3.5924 and a ies be ween 0.81 o 5.66.
Long- e m deb is an essen ial sou ce o deb
in capi al s uc u e. Pakis ani i ms use on a -
e age 0.1457 long- e m deb in hei s uc u e,
which anges o 2.26 a maximum. As he Paki-
s ani i ms ha e nega i e equi y, he e o e he a-
io is g ea e han 100%.
3.2 Mul i a ia e analysis
Tab. 3 shows he Pea son co ela ion ma ix o
he independen a iable. All he independen
a iables a e ee om he p oblem o mul i-
collinea i y. The co ela ion among a iables
is below he h eshold le el o 0.70, a limi
d awn by Ke in (1992) a e which we ha e
TD NED BI ROA TQ FS L DR
TD 1
NED 0.5941 1
BI 0.1335 −0.3839 1
ROA 0.1732 0.1232 0.0749 1
TQ 0.1501 0.0584 0.1273 0.3393 1
FS 0.2139 0.0268 0.1433 0.1052 0.0670 1
L DR −0.0972 −0.0207 −0.0265 −0.0568 0.0013 −0.3321 1
Sou ce: own (p ocessing in S a a 14)
No e: TD – o al di ec o s; NED – non-execu i e di ec o s; BI – boa d independence; ROA – e u n on asse s; TQ – To-
bin’s Q; FS – i m size; L DR – long e m deb a io.
Tab. 3: Co ela ion ma ix o he independen a iable
Va iable Obse a ion Mean S d. de . Minimum Maximum
Con ol a iables
ROA
1,376
0.0357 0.1695 −2.6480 3.1261
TQ 12.570 1.6705 4.8477 16.9737
FS 3.5924 0.7757 0.8152 5.6611
LTDR 0.1457 0.1925 0.0001 2.2625
In e ac ion e m
FO 1,376 0.5174 0.4998 0.0000 1.0000
Robus ness a iable
ID 1,376 1.3117 0.6797 1.0000 5.0000
Sou ce: own (p ocessing in S a a 14)
No e: TD – o al di ec o s; NED – non-execu i e di ec o s; BI – boa d independence; AEM – abno mal ea nings manage-
men ; AbCFO – abno mal cash low om ope a ions; AbP od – abno mal p oduc ion cos ; AbDisc – abno mal disc e ion-
a y expense; ROA – e u n on asse s; TQ – Tobin’s Q; FS – i m size; LTDR – long e m deb a io; FO – amily owne ship;
ID – independen di ec o s.
Tab. 2: Summa y s a is ics – Pa 2
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50 2023, olume 26, issue 2, pp. 42–57, DOI: 10.15240/ ul/001/2023-2-003
Business Adminis a ion and Managemen
a mul icollinea i y p oblem. Co ela ion esul s
a e cohe en o Asgha e al. (2020) and Al-
Haddad and Whi ing on (2019).
3.3 Resul s (GMM) o es ima ing AEM
and REM
Tab. 4 shows he esul s o es ima ing depen-
den a iables h ough GMM. Two speci ica ions
es s, i.e., he Hansen (1982)/Sa gan (1985)
es s and second-o de se ial co ela ion, speci y
he eliabili y and consis ency o GMM es ima es.
As esul s showed, an insigni ican p- alue
o 0.319, 0.062, 0.288, 0.081, and 0.131 ( espec-
i ely) alida es he alidi y o he ins umen al
a iable and ha he model is well speci ied.
The second es o he o e all alidi y o GMM es i-
ma es is he A ellano-Bo e /Blundell-Bond (AR2)
es o se ial co ela ion o e o e ms. An insig-
ni ican p- alue implies ha he o iginal e o e m
is se ially unco ela ed, and he momen condi-
ions a e co ec ly speci ied. Hence he esul s
showed insigni ican p- alue o AR2 i.e., 0.399,
0.314, 0.085, 0.306 and 0.07, espec i ely.
Panel da a eg ession analysis
o dependen and independen a iables
This esea ch uses panel da a eg ession anal-
ysis o s udy he impac o boa d independence
on ea nings managemen . Tab. 5 p esen s
he diagnos ics es s o all models. Ano he es
o de ec ing mul icollinea i y is he a iance in-
la ion ac o (VIF). Acco ding o Mye s (1990),
mul icollinea i y is p onounced in sample da a i
i s alue c osses 10. The VIF alue o all ou
models is 1.43, 1.48, 1.53, espec i ely, con-
cluding ha no a iable is a linea ans o ma-
ion o he o he . Hence, his s udy is ee om
he issue o mul icollinea i y. These indings
a e consis en wi h Al-Haddad and Whi ing on
(2019), and Ba aineh e al. (2018). Resul s a e
epo ed in Tab. 5.
This s udy uses a balanced panel o
172 i ms wi h 1,376 obse a ions a ound eigh
yea s. The Hausman speci ica ion es was es-
ima ed o iden i y he exis ence o ixed o an-
dom e ec s. Fo he acc uals model, Hausman
es alue (P ob > Chi2) is below 0.05; hence
he ixed-e ec model is p e e ed. AbCFO,
AbP od, and AbDisc alues o (P ob > Chi2)
a e highe han 0.05; we choose he andom
e ec model o bo h models. B eusch-Pagan/
Cook-Weisbe g’s es wi h he null hypo h-
esis o no he e oskedas ici y is es ima ed.
All h ee models epo a alue less han 0.05
(P ob > Chi2 = 0.0000); hence, ou sample
su e s om he e oskedas ici y. We es ima e
he Woold idge es o he absence o au oco -
ela ion o he e o e m o ul il ano he eg es-
sion assump ion. Resul s indica e he p esence
o au oco ela ion. This s udy uses linea panel
models wi h obus s anda d e o sugges ed by
Pe e sen (2009) o co ec o he e oskedas ici y
and au o-co ela ion.
Boa d size ( ep esen ed by he o al num-
be o di ec o s) signi ican ly impac ed AbDISC
and REM_ALL. These esul s co obo a e wi h
indings o Al-Haddad and Whi ing on (2019),
and Daghsni e al. (2016).
Boa d independence is ano he ac o ha
mi iga es he manage ’s oppo unis ic beha -
iou . When we use AEM as an EM p oxy, i has
a signi ican and nega i e impac . The esul s
a e consis en wi h Alden e al. (2019), Al-Had-
dad and Whi ing on (2019), and Zang (2012).
Fi m size is signi ican and nega i e when using
he AEM p oxy. Resul s a e consis en wi h
Capalbo e al. (2014) and Sáenz González and
Ga cía-Meca (2014). While wi h AbP od and
Tes s Disc AEM AbCFO COGS INV AbDISC
GMM 1s s ep
di e ence
2nd s ep
sys em
1s s ep
di e ence
1s s ep
di e ence 1s s ep sys em
AR2 0.399 0.314 0.085 0.306 0.070
S gn 0.319 0.062 0.288 0.081 0.131
Sou ce: own (p ocessing in S a a14)
No e: Disc AEM – disc e iona y acc uals; AbCFO – abno mal cash low om ope a ions; COGS – cos o goods sold;
INV – in en o y, AbDISC – abno mal disc e iona y acc uals; GMM – gene alized momen s o he me hod; AR2 – A ella-
no-Bo e /Blundell-Bond; S gn – Sa gan es .
Tab. 4: GMM esul s o c ea ing a dependen a iable (AEM and REM)
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