IMPACT OF CAPITAL STRUCTURE AND AUDIT COMMITTEE INDEX ON EARNINGS MANAGEMENT PRACTICES: MODERATING ROLE OF CORPORATE GOVERNANCE

Abstract

The study examines the impact of capital structure and audit committee characteristics (size, independence, and gender) on the earnings management of commercial banks in Pakistan. A quantitative research design was adopted to achieve the research objectives. Earnings management was measured using the earnings management index derived from the total accruals method. Whereas, the debt-to-equity ratio measured capital structure, and audit committee characteristics were assessed by creating an index of the un-weighted average of audit committee size, independence, and gender. The corporate governance of the moderator was measured by the board size of commercial banks in Pakistan. Nineteen companies are registered on the Pakistan Stock Exchange (PSX). The type of data collected was panel data, which was acquired from the published annual reports and the financial statements of the selected banks. The collected data was then entered into E-Views 12, a statistical software used to analyze data, in order to determine the impact of independent variables on dependent variables. The Panel regression analysis was used to analyze the data and test the hypotheses. Results demonstrate that capital structure and audit committee characteristics index have a positive and significant impact on earnings management. The moderating variable, corporate governance, also has a positive and significant effect on earnings management. The moderating interaction of capital structure is also substantial. Whereas, the audit committee characteristics index moderating interaction is insignificant in the model. These findings will help determine whether capital structure and audit committee characteristics influence earnings management in commercial banks.