Effect of Board Independence on Earning Response Coefficient (ERC): Evidence from Pakistan


  • Wahid Raza Ph.D Scholar, Department of Management Sciences, Islamia College Peshawar, Pakistan
  • Anjum Ihsan 2Assistant Professor, Department of Management Sciences, Islamia College Peshawar, Pakistan
  • Shahid Jan Chairman, Department of Management Sciences, Islamia College Peshawar, Pakistan




Board independence, independent directors and ERC, ERC Determinants and board independence


This study investigates whether board independence plays a significant role to enhance the Earning Response Coefficient (ERC) while controlling the established determinants of Earning Response Coefficient (Beta, Growth, Size and Earning Persistence). The study selected 250 non-financial firms of different sectors on the basis of purposive sampling technique which are enlisted in Pakistan stock exchange (PSX) for the time periods of eight years ranging from 2008 to 2015. Using reverse regression, it has been observed through statistical analysis that Beta is negatively related to ERC while others determinants (Growth, Size and Earning Persistence) are positively related to earning response coefficient (ERC). Moreover, the analysis result also suggested that corporate governance facet (Board independence) plays a significant role to enhance the earning response coefficient, because as per Pakistan Code of Corporate Governance (2012), the independent directors include those who are not connected to the companies, have no relationship with the companies and are free to exercise their judgment without any pressure. The important contribution for literature is that before making investment decision in stock market, investors should evaluate the corporate governance variables (Board independence) of the firms which can boost earning response coefficient (ERC). Secondly, previous studies (Shah,2017; and Collins & Kothari, 2004) and others researchers mostly worked on developed countries in the same area, but this research study is limited to emerging economy of Pakistan, that’s why it has great contribution for literature.


Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning

Bhagat, S., & Bolton, B. (2008).Corporate governance and firm performance. Journal of corporate finance, 14(3), 257-273.

Balatbat, M. C., Taylor, S. L., & Walter, T. S. (2004). Corporate governance, insider ownership and operating performance of Australian initial public offerings. Accounting & Finance, 44(3), 299-328.

Bhojraj, S., & Sengupta, P. (2003). Effect of corporate governance on bond ratings and yields: The role of institutional investors and outside directors. The Journal of Business, 76(3), 455-475

Billings, B. K. (1999). Revisiting the relation between the default risk of debt and the earnings response coefficient. The Accounting Review, 74(4), 509-522.

Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. Accounting review, 443-465.

Biddle, G. C., & Seaow, G. S. (1991). The estimation and determinants of associations’ between returns and earnings: Evidence from cross-industry comparisons. Journal of Accounting Auditing & Finance, 6(2), 183-232.

Bernard, V. L., & Ruland, R. G. (1987). The incremental information content of historical cost and current cost income numbers: Time-series analyses for 1962-1980. Accounting Review, 707-722.

Baysinger, B. D., & Butler, H. N. (1985). Corporate governance and the board of directors:Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), 101-124

Cheng,& Nasir. (2010). Earning Response Coefficients and the Financial Risks of China Commercial Banks. International Review of Business Research Papers, 6(3), 178-188.

Choi, J. J., Park, S. W., & Yoo, S. S. (2007). The value of outside directors: Evidence from corporate governance reform in Korea. Journal of Financial and Quantitative Analysis, 42(04), 941-962.

Cho, J. Y., & Jung, K. (1994). Earnings response coefficients: A synthesis of theory and empirical evidence. Journal of Accounting literature, 10(1), 85-116

Collins, D. W., & Kothari, S. P. (1989).An analysis of intertemporal and cross-sectional determinants of earnings response coefficients. Journal of accounting and economics,

(2-3), 143-181.

Cotter, j., Shivdasani, A., & Zenner, M. (1998). Best practices in corporate governance: what two decades of research reveals. Journal of Applied Corporate Finance, 16(2?3), 29-41

Dunstan, K. L., Keeper, T., Truong, T. P., & van Zijl, T. (2011). The Influence of Board Structure on the Value of NZX: Listed Firms and its Association with Growth Options.

Dhaliwal, D. S., & Reynolds, S. S. (1994). The effect of the default risk of debt on the earnings response coefficient. Accounting Review, 412-419.

Easton, P. D., & Zmijewski, M. E. (1989).Cross-sectional variation in the stock market responseto accounting earnings announcements. Journal of Accounting and economics, 11(2-3), 117-141.

Farooq ,S.U;& Kimani,D. (2015). The relationship between corporate governance and corporate Social Responsibility(CSR) Disclosure:Evidence from the USA.:Abasyn University Journal of Social Sciences, 8(2)

Fama, E. F. (1980). Agency Problems and the Theory of the Firm. Journal of political economy,88(2), 288-307

Fama, E. F., & Jensen, M. C. (1983).Separation of ownership and control. The journal of law and Economics, 26(2), 301-325.

Ghosh, A.,Gue,j., & jin, D. (2005). Auditor tenure and perceptions of audit quality. The accounting review, 80(2), 585-612.

Huson, M. L., Scot,J ., & Wiere, C. W. (1999). The reversal of abnormal accruals and the market valuation of earnings surprises. The Accounting Review, 76(3), 375-404.

Hill, C. W., & Snell, S. A. (1988) .External control, corporate strategy and firm performance in research?intensive industries. Strategic Management Journal, 9(6), 577-590.

Hermalin, B. E., & Weisbach, M. S. (1988). The determinants of board composition. The RAND Journal of Economics, 589-606.

Imran,M.O; & Malik,M. (2007). Firm performance and corporate governance through ownership structure: Evidence from Bangladesh Stock market.

Jeng, V., & Peng, J. L. (2007). The impact of corporate governance structure on the efficiency performance of insurance companies in Taiwan. The Geneva Papers on Risk and Insurance-Issues and Practice, 32(2), 264-282.

Judge, W. Q., & Zeithaml, C. P. (1992).Institutional and strategic choice perspectives on board involvement in the strategic decision process. Academy of management Journal, 35(4), 766-794.

Kulkarni, N., & Shin, H. S. (2007). Dividends and bank capital in the financial crisis of 2007-2009(No. w16896). National Bureau of Economic Research.

Kim, H., & Gu, Z. (2004). An examination of US hotel firms' risk features and their determinants of systematic risk. International Journal of Tourism Research, 14(1), 28-39.

Kai, H. (2003). Earnings Response Coefficient and Default Risk in Japanese stock market.

Kormendi, R., Lipe, R. (1987), Earnings innovations, earnings persistence and stock returns. The Journal of Business, 60, 323- 345.

Laila,k (2013).The Factors that Affect Earnings Response Coefficient on Miscellaneous Industry Manufacturing Sectors Company on the Indonesia Stock Exchange. Journal of Financial Economics, 87, 308-328.

Lipe, R. (1990). The relation between stock returns and accounting earnings given alternative information. Accounting Review, 49-71.

Martikainen.(1997). Price and volatility spillovers in Scandinavian stock markets. Journal of Banking & Finance, 21(6), 811-823.

Naimah &Siddhartha. (2006). Impact of firm size on earning response coefficient. Journal of Banking & Finance, 33(7), 1340-1350.

Palupi, J. (2006).Financial risks, growth, earnings and stock returns relationship: The case of Indonesia. International Review of Business Research Papers, 8(7), 79-93.

Pearce, J. A., & Zahra, S. A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of management, 15(2), 291-334.

Rosenstein, S., & Wyatt, J. G. (1990).Outside directors, board independence, and shareholder wealth. Journal of financial economics, 26(2), 175-191.

Shah,M.H.(2017). The significance of WTO,s Trade Related Investment Measures(TRIM,S)Agreement For Inward FDI in Sub Saharan Africa.

Saleem,I; & Khurshid,A. (2014).Do human resources practices affect employee performance?

Shah,S.Z.A; & Hussain,Z. (2012). Impact of ownership structure on firm performance evidence from non-financial listed companies at Karachi Stock Exchange. International Journal of Finance and Economics, 84, 6.

Susilawati, C. D. (2008). Faktor-faktor penentu ERC. Jurnal Akuntansi, 7(2), 143-158

Shangguan, Z. (2007). Risky debt and the earnings response coefficient: a reexamination in the presence of illiquid growth opportunities. International Journal of Business Innovation and Research, 1(4), 404-424.

Schellenger, M. H., Wood, D. D., & Tashakori, A. (1989). Board of director composition, shareholder wealth, and dividend policy. Journal of Management, 15(3), 457-467.

Vafeas, N. (2000). Board structure and the informativeness of earnings. Journal of Accounting and Public policy, 19(2), 139-160.

Wang,Z; Jahangir Ali,M. (2013).Value relevance of voluntary disclosure and the global financial crises :evidence from China. Managerial Auditing Journal ,28(50,444).

Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of financial economics, 40(2), 185-211.

Zakaria., Daud., Alawiyah., & Abidin. (2013).Default risk and the earnings response coefficient. Evidence from Malaysia. Journal of Basic and Applied Scientific Research, 3(6), 535-545

Zakaria, N.B. (2013).impact of default risk on earning response coefficient. Evidence from Malaysia. Journal of Modern Accounting and Auditing, 9(9)




How to Cite

Wahid Raza, Anjum Ihsan, & Shahid Jan. (2020). Effect of Board Independence on Earning Response Coefficient (ERC): Evidence from Pakistan. Review of Economics and Development Studies, 4(2), 153-164. https://doi.org/10.26710/reads.v4i2.386