by: Khalid Latif, Arshad Ali Bhatti, Abdul Raheman
The existing literature concerning governance-value relationship is inconclusive as it
assumes that the association is direct. A theoretical argument suggests that the effective
corporate governance reduces the information asymmetry through better financial reporting
quality. This serves as a tool to reduce this information risk. Following the argument,
our study is an attempt to investigate the mediating role of earnings quality, a measure of
financial reporting quality, in governance-value association. For estimation, we use a panel
data of 214 non-financial listed firms in Pakistan for the period 2003-2014 and employ
one-way random effect estimator for the SUR system, as suggested by Biørn (2004). Our
findings show that the corporate governance effectively improves the earnings quality and
value of the firm, which approves the monitoring role. Moreover, earnings quality contributes
positively in maximizing the value of the firm and the results demonstrate that better
earnings quality partially mediates the governance-value association. It is concluded that
corporate governance not only improves the value of the firm directly, but also indirectly
through the channel of earnings quality.
