Corporate governance Role between CEO compensation and earnings management: A developing economy Perspective Evidence from Pakistan

Abstract

The purpose of this research is to examine the relationship of compensation of CEO and management of earnings of firm and further investigated the corporate governance role as a moderator in this relationship in developing country, Pakistan. In this research, a sample of 100 Pakistani listed firms is used from 2012 to 2022. In e-views software, the technique of panel data is performed as the data is both time series and cross sectional, and the results of fixed effect model are used for analysis. The study finds that the impact of compensation of CEO on earnings management is positive and the relationship is moderated by governance structure of the firm. The association between compensation of CEO and management of earnings is positive and it is strengthened in weak governance system of company but this relationship weakens in strong governance system of firm. The sample of the study comprises of only CEO’s of firm. Other top management can be used to conduct this research. This study allows a clear understanding of how top management responds and reacts if corporate governance structure of the firm is weak or strong. Strong corporate governance structure can help the firm to control the manipulative behavior. The structure of CEO compensation may be designed in such a way that the interests of shareholders and managers are aligned and information asymmetry is reduced. This research adds significantly to the current literature by considering governance structure of company as a moderator between compensation of CEO and management of earnings in the perspective of Pakistan.