STAKEHOLDER THEORY, HEURISTIC BIAS, ACCRUAL- AND LOSS-AVOIDANCE-BASED EARNINGS MANAGEMENT: EVIDENCE FROM PAKISTAN’S COMMERCIAL BANKS
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Abstract
Purpose: This study examines the impact of board size, shareholding, and meeting frequency on earnings management practices in Pakistan's commercial banks, considering both accrual-based (EM1) and threshold-based (EM2) measures of earnings management
Design/Methodology: The study employs a panel of 251 observations for EM1 and 316 observations for EM2 across multiple years, using random-effects regression for EM1 and random-effects logistic regression for EM2. Models incorporate control variables along with era dummies capturing corporate governance reforms in 2012, 2017, and 2019
Findings: Board meetings are negatively and board shareholding is positively associated with EM1. Board size is negatively associated with EM2, suggesting a stronger role in mitigating threshold-based earnings manipulation. Regulatory reforms significantly shaped reporting behaviour, with the 2017 reforms showing the strongest negative association with EM1, alongside a contrasting increase in EM2. The findings are interpreted through stakeholder theory and heuristic bias theory, indicating that board attributes operate as both monitoring and behavioural-correction mechanisms, with different attributes more relevant to different forms of earnings management. The study is limited to commercial banks and two proxies of earnings management; future research could extend to non-financial firms, alternative earnings management proxies, and qualitative assessment of board behaviour.
Originality: Findings highlight the differential effectiveness of board characteristics across types of earnings management, informing policymakers and regulators about the role of board size, shareholding, and meeting frequency in enhancing financial reporting quality. The study contributes to the existing literature by combining stakeholder and heuristic bias theories in a Pakistani banking context, simultaneously analyzing accrual- and threshold-based earnings management under evolving corporate governance regimes.
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References
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