THE PRICING OF DISCRETIONARY ACCRUALS

- EVIDENCE FROM PAKISTAN

Zunera Khalid*

Farah Yasser**

Muhammad Mobeen Ajmal***

Abstract

Even now with the cutting edge businesses and specialized management, a large
number of the firms are owned by families in Pakistan. Agency disagreements and
issues exist between the management and the owners as well as the minority
shareholders and the block holders. To handle these feuds, accountants use
discretionary accruals. These accruals help to manage earnings and smooth
sharp trends to protect the interest of management and the owners. This study
determines whether the investors manage the earnings through discretionary
accruals or do they price these accruals when considering the stock price. This
study finds significant evidence that the market prices discretionary accruals. We
find that the firms with higher number of institutional ownership, high quality
audit production and higher number of independent board have significantly
higher impact of discretionary accruals on their stock returns as compared to
other firms.

Key Words: Pricing, Discretionary Accruals, Earnings Management, Audit

quality.

** MS Finance Scholar, School of Business and Economics, University of Management and

Technology, Lahore, Pakistan
Email: [email protected]

**** Assistant Professor, School of Commerce and Accountancy, University of Management and
Technology, Lahore, Pakistan
Email: [email protected]

****** Lecturer, Department of Finance, School of Business and Economics, University of

Management and Technology, Lahore, Pakistan
Email: [email protected]

Journal of Management and Research Volume 2 Number 2 2015

1. Introduction

In today’s modern business, most of the firms are owned by the families.
Major agency conflict and issues exist not only between the management and the
owners but between the minority shareholders and the management (controlling
family) as well. Trust holds a key position in today’s financial analysis procedures
due to increased agency conflicts. Management is answerable to the shareholders
for their each and every decision. There are many other stakeholders in the firm
and everyone tries to make such decisions into his/her best interest.

Discretionary accruals or earnings management is one of the examples in

which accountants try to make earnings smooth as per the will of authorities. A
need has been observed which leads to the concept of emerged appropriate
corporate governance. In the continuation, securities and exchange commission of
Pakistan gave a code of Corporate Governance. Good governance is a sign of
good corporate performance as it prevents the stampede on the rights of minority
shareholders and ensures better decision making.

The main purpose of this paper is to study the impact of discretionary

accruals on the stock valuation of the company. This paper further investigates
whether ownership structure, firm size and corporate governance practices affect
the discretionary accruals of the firm or not and do investors view discretionary
accruals differently in the existence of good corporate governance practices.

Good governance means that managers or controlling shareholders

contribute toward better utilization of corporate resources which lead to better
performance. Lenders and investors are more willing to invest in a firm with good
governance, which lowers the cost of capital as the firm is expected to invest
better in the future. Not only investors and lenders but other stakeholders i.e.
suppliers and employers want to work with such firms having good governance.
Such relationship will be more beneficial, prosperous and long lasting as
compared to the relationship with weak and less effectively governed firms.

Journal of Management and Research Volume 2 Number 2 2015

 Over the last few decades, role of corporate governance has gained
prominence. Corporate governance is not only a procedure through which
directors are elected and make decisions, in fact, it also provides a clear way for
the accountability of the firms. One of the ways through which the accountability
reached is via financial reporting. Pricing of discretionary accruals is one of the
financial reporting issues.

Various studies discussed the impact of different corporate governance

variables on the pricing of discretionary accruals. Gul, F. A, S. Lung, and B.
Srinidhi, (2000) examined the impact of debt and investment opportunity set as a
proxy for growth on the pricing of discretionary accruals. They concluded that
firms with higher growth have higher prices of discretionary accruals as compared
to other firms with lower growth. While the impact of debt on the relation of stock
returns and discretionary accruals are not significantly strong enough. Krishnan
(2003) examined the impact of audit quality of a firm on its pricing of
discretionary accruals. Researcher found that firms having high standard audit
firms (Big-6) have discretionary accruals priced more highly than those of other
firms, which are not audited by Big-6 audit firms.

Impact of ownership structure, firm size and other corporate governance

practices on the market pricing of discretionary accruals is the core theme of this
paper. In case of developing economies, inadequate literature is available
regarding pricing of discretionary accruals and its effects on ownership structure,
especially for Pakistan. Eldomiaty (2008) mentioned that because of the
insufficient information problems, the capital markets of the developing
economies are not efficient enough to compare with developed market. Therefore,
the outcomes of the developed countries cannot be generalized with the
developing countries like Pakistan where political risk is very high. Fluctuations
in rules regarding corporate governance are very frequent, family ownership
structure is very common, and the corporate structure is in developing phase. So,
in this developing economy, it sounds very interesting to find out the pricing of

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discretionary accruals, effects of ownership structure, firm’s size and corporate
governance practices in Pakistan.

The main purpose is to identify the empirical evidence related to the

impact of different governance variables on pricing of discretionary accruals. For
this study, we have selected a random sample of 30 firms listed in Karachi Stock
Exchange for the time period 2008-2013.

The first section of this paper contains introduction, whereas, second section
contains literature review, data and methodology is presented in third section, and
the fourth section contains results and conclusion.

2. Literature Review

Earnings management is the basic concept of earnings quality. The

reported earnings are devotedly associated with the change in net economic assets
rather than transactions linked with owners (Schipper & Vincent, 2003). This
concept is totally different from the earnings quality, which is based on the time
series properties of earnings (i.e. persistence, predictability, and variability of
earnings). These both concepts believe that discretionary accruals are used by
managers to convey their private information to investors.

There are many studies that have evaluated the ability of discretionary accruals
measurement models to divide the earnings into two parts, discretionary and non-
discretionary components by using their time series properties. We will use the
model prescribed by Dechowet. al. (1995) to measure the discretionary accruals.

Meanwhile, well-designed corporate governance structures are an

effective way to mitigate expropriation problems and earnings management (La
Porta et. al., 2000). There is prominent participation on corporate governance both
in practice and in academic research (Blue Ribbon Committee Report 1999;
Ramsay Report 2001; Sarbanes-Oxley 2002; Bebchuk & Cohen 2004). Frank
(2006) suggested that there are two basic categories for governance variables.

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First is the internal and other is external variables. External variables consist on
the firm’s institutional ownership pattern and takeover pressure on the firm.
While, internal variable set comprises of board structure with the ownership
concentration.

Warfield (1995) examined the impact of accounting policies for larger

firms. He found market considers that earnings of larger firms are more persistent
than the earnings of smaller firms. Company size is important factor when
considering the information asymmetry of a firm from the investors. Managers of
small firms can hide their private information more successfully as compared to
larger firms. Larger firms have more publically available information. So, market
can have more information about larger firms as compared to smaller firms that
will help them in the pricing of discretionary accruals.

Studies done to examine the pricing of accruals have found the association
between market prices and discretionary accruals to be positive (Subramanyam,
1996; Beaver & Engel, 1996; Chung, Ho, & Kim, 2001). These studies found
significant evidence about the market measuring discretionary accruals.

However, there are two types of earning management. First is efficient

earnings management and the second is opportunistic earnings management.
Efficient earnings management is used to improve the information content
communicated to private investors. On the other hand, opportunistic earnings
management is used to report earnings opportunistically to maximize utility
(Scott, 2006). If market is able to differentiate between these types of earnings
management then the market will positively value efficient discretionary accruals
and will negatively price opportunistic discretionary accruals. Schipper and
Vincent (2003) also mentioned that manipulation of earnings against the
accounting standards adversely affects the shareholders and is totally different
from the concept of true representation of earnings. Hamid et. al. (2014)found that
all corporate administration and money related characteristics variables have a
noteworthy relationship with earnings management rehearses.

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 Tang, Chen, and Chang (2013) researched the endogenous relationship
between unusual insider exchanging and accrual mishandling, and investigated
whether corporate administration influences this relationship or not. Results
suggested that insiders exploit private data on abnormal accruals to time their sale
of securities. More critical in this regard are those instances in which the misuse
of inside data for stock trading turns out to be more genuine, and especially
problematic when this controller of information is not a majority shareholder thus
misaligned from income group. Therefore, higher family ownership and control,
expanded administrative ownership, or a double leadership structure not only
affects more private data exchange between company and shareholders but also
reduces the probability of information misappropriation.

Hazarika, Karpoff, and Nahata (2012) found that the probability and speed
of CEO turnover are significantly identified with an organization's earnings
management. They found that the connection between earnings management and
forceful CEO turnover existed in both firms with great and terrible strategy as
before the accruals were used to flatten the reported earnings and in the latter to
fatten the reported earnings. These results showed that boards tend to act
proactively to train managers who oversee earnings, before the controls lead to
immoderate outer consequences.

Hsu and Wen (2015) investigated the impact of ownership structure and
board characteristics on discretionary accruals and real earnings management. The
results demonstrated that establishments with high shareholding proportion or
extraordinary shareholding focus give managers incentives to control
discretionary accruals for short-term profitability. The more significant insider
possessions can adequately regulate managers and restrict them to control real
earnings and to bring about the impediment of firm value. With respect to board
structure, setting up independent directors is incapable in monitoring the earnings
management conduct of the managers. With the duality of the board chairman and
CEO, the organization would control discretionary accruals to meet its objective

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due to entrenchment impact. The bigger the board size, the more capacity for the
board to monitor whether the managers conduct earnings management.

Chekili (2012) figured that vicinity of outer directors inside of the board,
board size and vicinity of a CEO appear to affect earnings management while the
other board characteristics are observed to be unbiased.

Firms with the higher institutional ownership need more management monitoring
actions as they have larger economic interest in those firms (Financial Statement
Roundtable, 1999). It is further found by many researches on the monitoring role
of institutional investors. Bushee, (1998) concluded that such organizations give
less incentive for management to reduce R&D expenses and target the short-term
goals. This shows that institutional investors play an important role in monitoring
the management actions.

Further, earlier studies also find that earnings management in business

group firms is higher than other firms with no business group. In this way, firms
with the family ownership and no business group have lesser opportunistic and
more efficient earnings management. Market must analyze this situation and then
do the price of discretionary accruals positively for the firms having family
ownership and no business group as compare to other firms (Kim&Yi, 2005).

There are only few researchers in literature that have studied the
relationship between institutional structure and discretionary accruals. Research
conducted by Shah et al (2009) found a negative relationship between
discretionary accruals and institutional ownership along with the corporate
governance variables. Further, Fayoumi et al., (2010) examined that there is no
universal and authentic evidence related to the impact of institutional structure on
the discretionary accruals.

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3. Hypothesis

In order to attain the main purpose of this study, these hypotheses have been
developed to be tested:

H1: There is an impact of discretionary accruals on stock return.

H2: There is an impact of discretionary accruals on stock return for the firms with
higher family ownership.

H3: There is a positive relationship between proportion of independent board and

the effect of discretionary accruals on stock return.

4. Research Methodology

4.1 Sample Selection

Current study selected a sample of only 30 companies of sugar industry

which have been listed on Karachi Stock Exchange and used data for the period of
2008-2013. The list of all selected companies has been mentioned in iAppendix.
The final sample of this study includes 150 Firms-year observations (30
companies time 5 years).

This study uses yearly data due to the limitations of corporate governance related
data and the possibility of biasness from the different datasets that are different in
observed frequencies. Therefore, to match the frequencies and investigate the
impact of corporate governance quality, ownership and firm size, we use yearly
data for this study of all the variables in performing analysis. This method of data
matching is also used in literature (e.g., Klock et al., 2005; Jiraporn et al., 2006;
Dittmar and Mahrt-Smith, 2007; Jiraporn and Gleason, 2007; Chava et al., 2009).

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4.2 Research Model

This study used the following research model to test hypothesis H1:

Model 1

RET it =α + β 1 NDAC it + β2 DAC it + β3 BOD+ β 4 DFAM it + β5 INST it + β 6 DSIZE it + β7 AUDIT it + β 8 AUDCOM

Where:

RET = Market adjusted return for 12 months period.

BOD = Proportion of independent board.

NDAC = Non-discretionary accruals.

DAC = Discretionary accruals.

DFAM = 1 if firm have proportion of family ownership > 50%, not belonging to
business groups and 0 otherwise.

INST = Proportion of institutional ownership.

DSIZE = Natural logarithm of market capitalization.

AUDIT = 1 if firm audited by category “A” auditors by SBP and 0 otherwise.

AUDCOM = 1 if firm have audit committee and 0 otherwise.

BM = Book-to-market ratio

To test hypotheses H2-H3, we use following research model:

MODEL 2

RET it =α + β 1 NDAC it + β2 DAC it + β3 DAC it∗DFAM it + β 4 DAC it∗INST it + β5 DAC it∗BODit + β 6 DAC it∗DS

The effect of discretionary accruals on stock return is moderated by

DFAM, INST, DSIZE, BOD, AUDIT, and AUDCOM. Therefore, in our research
model, each of these 6 variables is linked with discretionary accruals (DAC). For
our study, we use such variables which have an interaction with DAC. Therefore,

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coefficients of variables can easily show the incremental impact of each variable
on the relation of discretionary accruals and stock return.

β2
For example, if DFAM = 0, then the stock return will be affected by

due to discretionary accruals. If DFAM=1, then the impact of discretionary

β 2∧β 3 . β 3
accruals on stock return will be is the difference of DFAM=0 and

DFAM=1, which acts as the coefficient of interacting variable.

4.3 Measurement of Variables

Stock Return: Stock return is calculated as the difference between actual

stock return and market return as market adjusted return. For this study, return is
calculated on yearly basis.

Discretionary Accruals: Total accruals can be defined as the difference

between net income and cash flow from operating activities of each firm (ACCR
= EARN – CFO).CFO is defined as the net cash flow of the firms from their
operating activities and earnings as the net income of the firm before any
extraordinary items.

To calculate the total accruals, we use one of the following mentioned

2
models based on the highest value of adjusted R . The model that we have

tested for highest adjusted R2 are mentioned below:

Model 3-A(Jones, J.J. -1991)

ACCR it =α+ β 1 ∆ REV it + β 2 PPE it +ϵ it

Where: ACCR = Total accruals,

REV t −REV t−1 ) .

ΔREV = Change in revenue from year t-1 to year t (

PPE = Gross property, plant, and equipment in year t. All variables are scaled by
beginning total assets.

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 Model 3-B (Dechow, P.M., Sloan, R.G. and Sweeney, A.P. -1995)

∆ REV
[¿ ¿it −∆ REC it ]+ β 2 PPE it +ϵ it
ACCRit =α + β 1 ¿

Where: ΔREC = change in net accounts receivables from year t-1 to year t

( REC t −REC t−1 ) . All variables are scaled by beginning total assets.

Model 3-C (Kasznik, R. 1999)

∆ REV
[¿ ¿it −∆ REC it ]+ β 2 PPE it + β 3 ∆ CFOit +ϵ it
ACCR it =α + β 1 ¿

Where: ΔCFO = Change in cash flows from operation from operation from year t-

CFOt −CFOt −1 ) .
1 to year t ( All variables are scaled by beginning total assets.

Values get from the above suitable model will be the values of non-discretionary
accruals and discretionary accruals are defined as the residuals like:

DA = ACC – NDA

4.4 Family Ownership and Business Group

Family ownership is defined as all individuals and firms whose ownership

listed, is not public, financial institutions and public (individuals whose ownership
is not listed). Ownership should be listed when ownership is greater than 5%
(Arifin, Z., 2003). Sample firms are classified as firms with family ownership
(family ownership > 50%) and low family ownership (family ownership < 50%).
Then, we make dummy variable where 1 for firms with high family ownership
and with no business groups and 0 for otherwise.
4.5 Institutional Ownership

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 Institutional ownership can be defined as the percentage of shares or
ownership held by institutions that include shares owned by social security and
other funds. Insurance companies (life and non-life), mutual funds, pension funds
and investment companies, and financial institutions i.e. banks are classified
under the definition of institutions (Koh, 2003).

4.6 Firm Size

This study uses natural logarithm of total assets as a proxy for the firm
size. Firm’s decisions about accruals management are influenced by the firm size
as well. We supposed that large firms are more visible (Watts and Zimmerman,
1986) and can easily manage the earnings to minimize the effect of political
visibility (Moses, 1987; Hsu and Koh 2005).

Nevertheless, literature also have some studies which argue that larger
firms have more information that can be scrutinized by the analysts and income of
larger firms smoothed by the investors add little value (Ashari et al., 1994).
Accordingly they have fewer incentives to smooth the earnings of larger firms
(Atik, 2008). Therefore, in literature, we do not have any specific information that
can be predicted about the relationship between firm size and discretionary
accruals.

5. Corporate Governance Practices

5.1 Independent board (bod)

Proportion of independent board is calculated as the number of

independent directors divided by the total board size.

5.2 Auditor size (audit)

In our study, we used auditor size variable in order to measure the quality
of audit as a dummy variable. We use 1, if firm is audited by category “a” auditors
by sbp and 0 otherwise.

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5.3 Existence of audit committee

In our study, we used a dummy for this variable where 1 if firm is having
an audit committee and 0 otherwise.
5.4 Book-to-market ratio

Book to Market ratio is used as a control variable in this study to control

the incentives that can influence the manager’s discretionary accounting choices.
Book to market ratio is calculated as ending book value of equity divided by
ending market value of equity.
6. Results

6.1 Evaluation of Earnings Management Model

We evaluate each earnings management model on the basis of their

2
explanatory power (Adjusted R ¿ . The below mention table 1 shows the results

of each model 3-A, 3-B and 3-C. As model 3-C shows the highest value of
2
Adjusted R . Therefore, we recommend this model for our main analysis.

Table 1: Earnings evaluation model

Measurement Model 2
Adjusted R

3-A 0.219
3-B 0.221
3-C 0.223
6.2 The Pricing of Discretionary Accruals

The above mentioned table shows the summary statistics of each variable
in the study. All these summary statistics values are before transformation. After
this, transformed all the variables then perform regression and check the
correlation between the variables as well. But, before going further, we check all
the assumptions of regression analysis like test the linearity, normality for the
dependent and independent variables.

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 Table 2: Correlation Matrix
AUDIT AUDCOM DFAM INST RET BM DSIZE DAC NDAC BOD
** **
AUDIT Pearson 1 -.286 -0.134 .332 0.143 0.09 0.133 -0.097 -0.155 -0.157
Correlation
Sig. (2-tailed) 0 0.103 0 0.081 0.275 0.105 0.237 0.059 0.055
AUDCOM Pearson -.286** 1 .267** 0.112 -0.036 0.117 0.152 -.165* -0.038 +0.074
Correlation
Sig. (2-tailed) 0 0.001 0.173 0.658 0.155 0.064 0.044 0.641 0.368
**
DFAM Pearson -0.134 .267 1 .333** 0.118 0.143 -0.034 -0.064 0.144 .346**
Correlation
Sig. (2-tailed) 0.103 0.001 0 0.15 0.082 0.681 0.438 0.078 0
INST Pearson .332** 0.112 .333 **
1 0.124 0.145 0.028 .213** 0.108 -0.104
Correlation
Sig. (2-tailed) 0 0.173 0 0.132 0.077 0.738 0.009 0.187 0.205
RET Pearson 0.143 -0.036 0.118 0.124 1 -0.004 0.025 -0.006 0.035 -0.013
Correlation
Sig. (2-tailed) 0.081 0.658 0.15 0.132 0.96 0.764 0.938 0.674 0.876
BM Pearson 0.09 0.117 0.143 0.145 -0.004 1 -.213** .254** .164* -0.035
Correlation
Sig. (2-tailed) 0.275 0.155 0.082 0.077 0.96 0.009 0.002 0.045 0.671
**
DSIZE Pearson 0.133 0.152 -0.034 0.028 0.025 -.213 1 -.771** -.295** -0.06
Correlation
Sig. (2-tailed) 0.105 0.064 0.681 0.738 0.764 0.009 0 0 0.463
DAC Pearson -0.097 -.165* -0.064 .213** -0.006 .254** -.771** 1 .479** 0.009
Correlation
Sig. (2-tailed) 0.237 0.044 0.438 0.009 0.938 0.002 0 0 0.914
NDAC Pearson -0.155 -0.038 0.144 0.108 0.035 .164* -.295** .479 **
1 0.11
Correlation
Sig. (2-tailed) 0.059 0.641 0.078 0.187 0.674 0.045 0 0 0.181
BOD Pearson -0.157 +0.074 .346** -0.104 -0.013 -0.035 -0.06 0.009 0.11 1
Correlation
Sig. (2-tailed) 0.055 0.368 0 0.205 0.876 0.671 0.463 0.914 0.181

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**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

Table 2 shows correlation matrix of each variable that has been used in
this study. Correlation matrix shows positive correlation between AUDIT and
DSIZE. It shows that firms larger in size tend to be audited by category “A”
auditors. Positive correlation between AUDCOM and BOD clearly shows that
firms with high proportion of independent directors in their board tend to have
audit committee. Most of the firms among our selected sample are non DFAM
firms and are audited by Category A auditors.

RET it =α + β 1 NDAC it + β2 DAC it + β3 BOD+ β 4 DFAM it + β5 INST it + β 6 DSIZE it + β7 AUDIT it + β 8 AUDCOM

Table 3: Statistical Data

Variable Coefficient t-Statistics p-value

Constant 0.212 0.124 0.092
DAC 0.210 1.689 0.097
NDAC -0.378 -0.286 0.47
AUDIT 0.245 1.812 0.076
AUDCOM -0.264 -2.037 0.047
DFAM 0.169 1.123 0.266
INST 0.095 0.688 0.495
BOD -0.184 -1.311 0.196
DSIZE 0.158 1.012 0.316
BM 0.064 0.472 0.639
R square 0.249
F-Statistics 1.994
DW-test 2.052
p-value (F-statistics) 0.058

*Dependent variable: RET = market adjusted return.

Independent variables: BOD = proportion of independent board, NDAC = non-discretionary

accruals, DAC = discretionary accruals, DFAM = 1 if firms have high family ownership and not
belonging to business groups and 0 otherwise, INST = institutional ownership, DSIZE = 1 if firms
in the 50% highest market capitalization and 0 otherwise, AUDIT = 1 if firms audited by big 4

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auditors and 0 otherwise, AUDCOM = 1 if firms have audit committee and 0 otherwise, BM =
book-to-market ratio.

*** Significant at 1% ** significant at 5% * significant at 10%*

Table 3 represents the regression result for model-1. From these results, F-
Value for this regression model is 1.994, which is significant (0.058<0.1) and
almost 25% variance has been explained by the model, it shows that the model
can be significantly used to test the impact of discretionary accruals on stock
returns. As this model for adjusted market return is significant, it shows that there
is a linear relationship between the variables in the model.

As DW test value is 2.052, which are between two critical values 1.5 to
2.00, it is a proof that there is not any type of first order linear auto-correlation
between the data. There is no multi-co-linearity problem as it clearly shows from
the values of VIF, condition index values, Tolerance and Eigen values. As all the
Eigen values are greater than one, variance inflation factor (VIF) is less than 2
and condition index values are less than 15 and values in case of tolerance are
greater than zero as well. All these evidences show that there is no issue of multi-
co-linearity between the variables in the used regression model for the adjusted
stock returns.

The above mentioned results show that DAC coefficient is positively

significant which predicts that market valuation of discretionary accruals is
positive. When market is efficient then this result clearly shows that the firm will
not go for opportunistic earnings management. Results of this regression model
clearly shows that our hypothesis H1 has been accepted, which means that
discretionary accruals have significant impact on the stock return.

Table 4 shows the results for hypothesis. Value for hypothesis 2H is

negative and highly insignificant which shows that family ownership does not
have any impact on the relation between discretionary accruals and stock return.
There may be negative impact of family ownership on the pricing of discretionary
accruals. Firms with high family ownership tend to take more personal beneficial

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decisions than that of other shareholders. As, market take family ownership as a
negative impact on the pricing of discretionary accruals. We can take it as another
perspective.

Hypothesis H3 is supported by our results which state a positive

relationship between proportion of institutional ownership and the effect of
discretionary accruals on stock return. As a result institutional investors are able
to have any impact on management’s policy and market may not consider family
ownership as an effective and significant factor in the pricing of discretionary
accruals. We can take it in another way. Most of the investors tend to be interested
in long-term focus and may put more pressure on management. In this way,
market can consider institutional ownership as an important factor in the pricing
of discretionary accruals.

RET it =α + β 1 NDAC it + β2 DAC it + β3 DAC it∗DFAM it + β 4 DAC it∗INST it + β5 DAC it∗BODit + β 6 DAC it∗D

Table 4: Statistical Data

Variable Coefficient t-Statistics p-value

Constant -1.443 -0.425 0.073
DAC -0.047 -0.283 0.778
NDAC 0.240 1.728 0.090
DAC*INST 0.465 1.830 0.074
DAC*AUDIT -0.281 0.965 0.033
DAC*AUDCOM 7.370 1.198 0.237
DAC*SIZE -5.594 -0.976 0.334
DAC*DFAM -0.810 -1.552 0.127
DAC*BOD 1.227 2.222 0.031
AUDIT 0.0213 1.001 0.322
AUDCOM 0.379 0.737 0.465
BOD 0.018 0.097 0.923
DFAM -0.016 -0.067 0.947
INST 0.278 1.356 0.181
DSIZE 0.065 0.277 0.783
BM 0.015 0.100 0.920

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 R square 0.351
F-statistics 1.732
DW-test 1.939
p-value (F-statistics) 0.076
*Dependent variable: RET = market adjusted return.

Independent variables: BOD =Proportion of independent board, NDAC = non-discretionary accruals, DAC =
discretionary accruals, DFAM = 1 if firms have high family ownership and 0 otherwise, INST = institutional
ownership, DSIZE = 1 if firms in the 50% highest market capitalization and 0 otherwise, AUDIT = 1 if firms
audited by big 4 auditors and 0 otherwise, AUDCOM = 1 if firms have audit committee and 0 otherwise, BM
= book-to-market ratio.

*** Significant at 1% ** significant at 5% * significant at 10%

7. Conclusion

This study examined the pricing of discretionary accruals and investigates

that whether market attaches any value on discretionary accruals. This study also
investigates that whether ownership structure, firm size and corporate governance
affect these pricing of discretionary accruals of Pakistani Sugar firms during the
period 2008-2013. Results of all empirical models (Regression) concluded a
significant relationship in the favor of positive market pricing of discretionary
accruals with institutional ownership, audit quality and board independence.
Other variables like family ownership structure, firm size and other governance
practices found to be insignificant and did not show any impact on the significant
relationship discretionary accruals and higher stock returns. It is finally concluded
that firms with larger share of independent board, institutional ownership and high
quality of audit will have more chances to have a strong impact on the
relationship between pricing of discretionary accruals and market returns.

Like other studies, this study also has some limitations. First is related to
the ability of measurement model 3-A to accurately divide the accruals into two
components, discretionary and non-discretionary accruals. Question mark still
exists on the efficiency of this model and misclassification of discretionary and
non-discretionary accruals. Second one is about the lack of data of corporate
governance index. For this study, we have used only audit quality, audit

Journal of Management and Research Volume 2 Number 2 2015

committee, BOD variables to measure the quality of corporate governance of the
firm. There is no proper source in Pakistan from where we can easily get
corporate governance index data except the code of corporate governance in
Pakistan by SECP. This study use firm size, ownership structure and governance
practices to test its impact on the pricing of discretionary accruals. There are
many other factors that can affect the pricing of discretionary accruals in better
way. Inclusion of more independent and control variables are recommended to be
added to get more significant findings.

Journal of Management and Research Volume 2 Number 2 2015

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