Identifying the Moderating Role of Income Smoothing and Credit Quality towards Corporate Governance and Determinants

Abstract

Though studies related to corporate governance shaping risk management are ubiquitous, fathoming income smoothing behavior and credit quality is fundamental to commercial banks, especially pertaining to economies in transition. In this context, we used panel data of eighteen commercial banks of Pakistan including both conventional and Islamic, for the period 2007 to 2017. The concept is supplemented by ownership and board structure as apt indicators of corporate governance and deeming income smoothing and credit quality as moderators is the peculiarity of our study. Surprising to note, our risk management model outperformed regulatory capital and profitability, on the road to monitoring effectiveness. Albeit income smoothing constantly remains a matter of concern, credit quality is imperative for risk management in our case. Hence, based on findings, practitioners are suggested to consider board meetings and block holder ownership with aplomb for monitoring effectiveness of commercial banks of Pakistan. Nonetheless, institutional ownership demands further attention.