Corporate Fraud, Ameliorating Actions, and Earnings Quality: Empirical Evidence from Pakistan Stock Exchange (PSX)

Abstract

The study aims to investigate the impact of management and governance changes on the earning quality of the fraudulent firms following the fraud revelation. The earnings quality is considered for the investigation because it provides objective information to the market participants. The study uses Enforcement Action Publications in Pakistan to identify the fraud sample for 1997-2021. The regression results offer little support for the increase in ex-post earnings quality of the fraudulent firms. The results are robust to different earnings quality models and alternative estimation methods. Despite some improvements in management and governance quality, the study argues that these mechanisms are not sufficiently strong to counter earnings quality problems in Pakistan. The findings corrobaorates that the reduction in earnings management benefits stakeholders who depend on the external audit to monitor the accuracy of business financial reporting.