Corporate Governance and Financial Reporting Quality: Evidence from Pakistan

Abstract

This study examines the effect of corporate governance mechanism on quality of financial reporting for seventy non-financial firms which are listed at Pakistan Stock Exchange for the period ranging from 2006 to 2016. We quantify financial reporting quality using the McNichols (2002), and DD (2001) models, while the corporate governance index has been generated using the principal component analysis based upon board independence, institutional ownership, the board size, frequency of board meetings held as governance attributes. Our results indicate the positive effect of all corporate governance variables upon financial reporting quality, except the leverage which negatively influences financial reporting quality. Thus, findings also reveal that the governance mechanism in major significantly enhances the reporting quality of the firms. Corporate governance in Pakistan plays a very pivotal role in providing purified and better information about the company’s conditions and progress. Although the sample of 70 non-financial companies limits the generalizability of the study, nevertheless, it contributes to the existing body of literate, as this is the pioneer study in Pakistan which explores the role of corporate governance in affecting the quality of financial reporting using DD and McNichols models