تاثیر رفتار مدیریت سود بر روابط مشارکت دولتی و ارزش شرکت، شواهدی از بازار در حال ظهور Does managerial behavior of managing earnings mitigate the relationship between corporate governance and firm value? Evidence from an emerging market

1. Introduction The researchers in corporate finance have long recognized the widespread separation of ownership and control in firms that has created the potential agency problem which may be costly. The mangers have substantial freedom to pursue their personal benefits at the expense of shareholders’ wealth due to limited incentive of shareholders to monitor the behavior and performance of managers (Kolsi & Grassa, 2017). The core objective of shareholders is to earn returns on their invested capital, whereas managers are likely to be focusing on their personal goals such as consummation of perquisites (Jensen & Meckling, 1976), power and prestige of running a large organization (Hubbard & Palia, 1995), or their job security by not investing in risky but rewarding projects (Amihud & Lev, 1981). In this regard, managers’ superior access and control over the firm’s resources give them upper hand and they take decisions which are aligned with their personal objectives instead those of shareholders. The principle of shareholders’ wealth maximization will not motivate corporate decision making in the absence of effective corporate governance mechanisms. Since the publication of pioneer work by Berle and Means (1932), immense literature has been stimulated on the agency theory of principal and agents and researchers have tried to explore the potential adverse effects of absence of effective control mechanism and misalignment of shareholders and managers’ interests. Along with the agency phenomenon, the global financial catastrophe and investors’ desire for companies to have good corporate governance system also amplified its importance. The Asian Financial Crisis of 1997 had adversely hindered many corporations in South East Asian countries putting long lasting effects on their economies (Sachs, 1998). Generally, poor corporate governance structure is assumed to be the source of these crises up to a certain extent (D’Cruz, 1999; Khas, 2002). Moreover, the financial collapse of conglomerates such as Enron, Etoys, Adelphia, World Com, Parmalat, Commerce bank, XL Holidays have ruined the investor confidence in the capital markets and cautioned the world for the need to have a transparent and fair governance system in companies. During the last couple of decades, regulators, investors, policy makers and other capital market participants have been increasingly focusing on the need for firms of have an effective monitoring and accountability system of corporate governance to minimize agency problem (Epps & Ismail, 2009). The relationship between corporate governance and managerial choices for value creation is a topic of continuing interest for researchers. It is believed that practices of corporate governance are value enhancing (Johl, Khan, Subramaniam, & Muttakin, 2016) and a firm with effective governance system can increase its value by lowering the conflict of interest between dispersed minority shareholders and empowered managers of firms as well as by reducing information asymmetry and increasing managerial efficiency (Audousset-Coulier, Jeny, & Jiang, 2016). After the implementation of Sarbanes-Oxly (SOX) Act of 2002 in the United States, most of the countries had begun to realize the importance of effective corporate governance mechanisms to reduce agency cost and create value for shareholders. This realization has also ignited research in developed as well as developing countries of the world to investigate the impact of corporate governance on firm value (Core, Guay, & Rusticus, 2006, Sami, Wang, & Zhou, 2011), however, findings are still indecisive. Most of the researchers had documented a strong positive association between corporate governance and firm value (Gompers, Ishii, & Metrick, 2003, Cremers and Nair, 2005, Bebchuk, Cohen, & Ferrell, 2009). On contrary, some also found mixed or no evidence of relationship between corporate governance and firm value (Yermack, 1996, Lehn, Patro, & Zhao, 2007). However, Gompers et al. (2003) and Cornett, Mcnutt, and Tehranian (2009) suggested that relationship between corporate governance and firm value is endogenous which needs to be addressed more comprehensively and rigorously.