Earnings Management in the Banking Industry of Pakistan: Drivers and Implications

Abstract

This study examines the factors influencing earnings management in Pakistan's commercial banking sector over five years from 2020 to 2024. A sample of 19 commercial banks listed on the Pakistan Stock Exchange (PSX) was selected for analysis. Earnings management was measured using discretionary accruals as the dependent variable, while the independent variables included dividend policy, capital structure, firm size, and bank profitability. Panel data was extracted from the annual reports and financial statements of the selected banks and analysed using E-Views 12 statistical software. The study employed panel regression analysis based on the Hausman test, which confirmed the suitability of the fixed effects model. The results indicated that all selected variables had a statistically significant and positive impact on earnings management. Specifically, capital structure (B = 0.250, p < 0.001), bank profitability (B = 0.250, p < 0.001), firm size (B = 0.241, p < 0.001), and dividend policy (B = 0.250, p < 0.001) were identified as key determinants. These findings suggest that both internal financial strategies and structural characteristics have a significant influence on the earnings management behaviour of commercial banks in Pakistan. The study offers practical insights for bank management, regulators, and policymakers in strengthening governance mechanisms and promoting financial transparency in the banking sector.