Impact of Corporate Governance of Earnings Management and Cost of Capital: Evidence From Pakistan

Abstract

CoC, this study measures it through the weighted average cost of capital (WACC). CG is measured through an index developed from different factors of CG namely Board of Directors (BoD), Ownership and shareholding, and transparency, disclosure, and auditing. The study also includes control variables of the size of the firm, performance, leverage, capital expenditures, and cash flows from operations, Beta and gross domestic product growth rate. For the first stage of the thesis, the results show that CG significantly and negatively affects EM practices and this association is statistically significant. In stage two, the association of CG and CoC is negative and statistically significant. In the last stage of the thesis, the study finds that EM is positively associated with CoC and the association is statistically significant. The overall findings of the study support the theoretical justifications that a strong and efficient system of CG ensures the dissemination of information to the concerned quarters and all stakeholders through the disclosure requirements of a firm. This disclosure of information not only improves the quality of accounting information but also builds and restore the trust of investors on the firm fundamental information. Thus, investors take into account the disclosed information while making the investment decision and thus reduces the cost of capital of a firm. Moreover, conclude that earnings manipulation practices of management generate the negative signal in the capital market. Thus, investors demand extra returns on their investment as compared to non-manipulated firms.