Effect of board independence on Earning Response Coefficient (ERC): evidence from Pakistan

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.