Nexus of Corporate Governance, Financial Reporting Quality and Investment Efficiency

Abstract

This paper examines the relationship between corporate governance, financial reporting quality, and investment efficiency using data from 207 non-financial firms listed on the Pakistan Stock Exchange (PSX) for a period of 9 years from 2008 to 2016. Since the Pakistan Corporate Governance Code was revised in 2012, therefore consistent with previous studies, the effect of the promulgation of the new corporate governance code on financial reporting quality is also analyzed. Thus, using the GMM model, the results of the study show that the Corporate Governance Code 2012 improves the quality of financial reporting. Owners of family firms confiscate the wealth of minority shareholders by deteriorating the quality of financial reports. Independent directors of the board and independent directors of the audit committee effectively monitor the financial reporting process. Family ownership, board independence and audit committee independence interact with the code in affecting financial reporting quality and substitute or complement each other. Inefficient investments decrease financial reporting quality. Furthermore, the new governance code has an incremental effect on the relationship between investment inefficiency and financial reporting quality.