Reestablishing the legitimacy after fraud: does corporate governance structure matter?

Abstract

Purpose

The study aims to yield evidence on the relation between the quality of governance characteristics and the firms' financial credibility involved in financial violations.

Design/methodology/approach

The study uses annual data ranging from 2000 to 2018. The sample consists of 154 nonfinancial firms listed on the Pakistan Stock Exchange, comprising 77 fraudulent and 77 non-fraudulent companies. To examine the relationship between improvements in the governance structure and financial credibility of the firms, hypotheses are tested using the univariate analysis and multivariate regression model through the ordinary least square method.

Findings

The results affirm that fraud firms are possessed with poor governance structure compared to control firms in the pre-fraud year. The findings further imply that an improved governance structure brings foremost performance in stock price. The results of the study divulge that board of directors characteristic i.e. change in outside directors' percentage has a significant positive impact (β = 0.015, p = 0.05) on the financial credibility of the firms. The governance variables in terms of CEO-COB joint position has a significant negative (β = −0.824, p = 0.05) association with the financial credibility, which means that whenever CEO-COB joint position enhances, the financial credibility of the firms decreases. However, governance variables in the context of blockholders percentage has a significant positive (β = 0.13, p = 0.01) impact on financial credibility. The results of the study overall indicate that the governance structure has a significant influence on the financial performance of firms in the stock market.

Originality/value

The study provides an understanding of how fraudulent firms rehabilitate their governance structure and accrue economic benefits by the means of financial credibility after when the fraud is made public. It also adds to the literature in the area of corporate frauds specifically the role of governance structure in the financial performance of fraudulent firms in the stock market; this field is in its initial stage, even in developed countries, while, in developing countries, little work has been done.

Citation

Rizwan, S. and Chughtai, S. (2023), "Reestablishing the legitimacy after fraud: does corporate governance structure matter?", South Asian Journal of Business Studies, Vol. 12 No. 4, pp. 537-558. https://doi.org/10.1108/SAJBS-08-2020-0286