This document presents a research proposal exploring the relationship between managerial ability, earning quality, and firm performance. The study aims to examine: 1) The direct impact of managerial ability on firm performance 2) The effect of managerial ability on earning quality 3) The effect of earning quality on firm performance 4) Whether earning quality mediates the relationship between managerial ability and firm performance. The study will analyze data from 214 non-financial firms listed on the Pakistan Stock Exchange from 2008-2019, using structural equation modeling to test relationships between variables. The researcher hypothesizes that managerial ability positively impacts both earning quality and firm performance, and that earning quality mediates the effect of managerial ability

1. Anam Ashiq
PhD Scholar
Reg.# 2018LXSD0004
Management Sciences and Engineering
Supervisor:
Prof. Zhong Guoxing

2. Managerial Ability and Firm Performance:
Exploring the Mediating role of Earning
Quality
Title

3. Introduction & background
Role of Managerial ability and earning quality in Firm performance
• Managerial ability is an important dimension of human capital in the firms that
ensures the best utilization of firms’ scarce resources in challenging environments
to attain the sustainable growth. The lack of skilled labour may affect the quality
of production and innovation in Pakistani firms.
• Managers with high skills tend to avoid actions that would damage their
reputations. However, managers may also degrade the company’s performance
by committing a fraudulent act (Andrew, 2015).
• The agency problem provides an opportunity for managers to act
opportunistically, for personal gain (Jensen & Meckling,1976).

4. • Manipulation practices often occur because the company is
required to meet the needs of corporate stakeholders in
maintaining a company. Growth and development of the
company can not be separated from the role of a manager.
• Earning quality has drawn a great deal of attention from
accademies and enterpreneurs because it incorporates much
more information on corporate and financial reporting and may
impact financial performance.
• Low earnings quality implies either high risk, which increases
the cost of capital, or information bias, which leads to incorrect
managerial decisions.

5. Objectives
 The difference of this study with previous studies is the use of earning quality as
an intervening variable, which is as an intermediary between managerial to
company performance.
 Therefore, research needs to be done to know more clearly whether there is
direct influence between managerial ability to company performance or indirect
influence between two variables through the existence of earnings quality as
intervening variable.
For this study I have selected 214 non-financial firms listed on Pakistan stock
exchange, which includes the Manufacturing and service industries.

6.  Manufacturing industry is considered the backbone of economic
development. It promotes domestic production, exports and generates
employment, hence stimulates the overall growth of economy. In Pakistan
manufacturing industries contributes 12.79% to gross domestic products
GDP and sector employs 16.1 percent of the country is labour force.
 To boost manufacturing and industrial sector government is providing a
series of subsidies and incentives to these sectors.
• Subsidies to industries for electricity and gas
• Export development packages
• Long Term Trade Finance (LTTF)
• Export Refinancing Scheme (ERS) at subsidized rate.

7. Research Questions
 What is the direct association of Managerial ability with Firm
Performance?
 Does Managerial ability affects Earning Quality?
 Does Earnings Quality affects Firm performance?
 Does Earning Quality mediates the relation between Managerial
ability and Earning Quality?

8. Theoretical Model
Managerial
ability
Earning
Quality
Firm
Performance
Firm Size
Leverage
Direct Effect
Indirect Effect
H1
H2 H3
Control Variables

9. Significance of Study
 Findings of the study can be utilized to inform investors investment
decisions and creditors lending decisions
 It has significant policy implications for country reforms and
regulators working to improve the country financial reporting
quality and transparency.
 The findings are important for board members when considering
the cost and benefits of managers because managerial ability affects
not only the operations of firms, but also quality of reported
earnings.

10. Literature Review
Managerial Ability and firm performance
Recent literature has investigated whether managerial characteristics and
competencies such as ability, talent, quality or reputation influence corporate
decision-making
Chang et al. (2010) link variations in management actions and styles to
variations in firm performance, consistent with the view that differences in firm
performance may also stem from managers’ traits or experiences.
Able managers bring intangible resources in the firms, which positively
contribute to the firm performance even in the challenging
environment and the weak legal systems.

11. Earning quality and frim performance
The relevant literature claims that having high-quality earnings is a desirable
trait in companies.
Low-quality earnings also introduce an information risk to investors, and thereby
increase the cost of capital (Francis et al. 2004). The positive relationship
between earnings quality and corporate performance is theoretically proved.
However, empirical result seems not always to provide evidence that high
earnings quality is associated with high corporate performance and vice versa.
Increased earnings accompanied by high accruals suggest low earnings quality.
Penman and Zhang (2002) document that growth firms in sales or net operating
assets are accompanied with lower earnings quality.

12. Methodology
Sample Selection
 In this study, sample firms listed on the Pakistan Stock Exchange for the period
2008-2019 have been used.
 To cover the period 2008-2019, the study employs a data set of 214 companies that
were recognised and listed on the Pakistan Stock market.
 Financial institutions have distinct regulatory environments, capital structure and
accounting methods. therefore, firms from Banking, insurance and financial sectors
are excluded.
 Annual reports and data base information are used to compile the data.

13. Statistical techniques
This study develops an integrated approach combining data
envelopment analysis (DEA) and structural equation modeling (SEM)
for estimating the Managerial ability and evaluating the effects of diverse
exogenous variables on the Earning Quality and firms’ performance.
Structural equation modeling
SEM is a statistical tool where models of causal relationships among two
or more variables are tested (Klem, 2000)
SEM measures relationships between variables through direct and
indirect associations.

14. Measurement of Research Variables
Variables Measurements
Earning quality attributes • Persistence (PRS)
• Predictability
• Smoothness
• Value relevance
• Accrual quality
Frim Performance Tobin’s Q and ROA
Managerial ability
Measures presented by Demer et al.,2012,
using data envelopment analysis (DEA)
Frim Size Size of company measured by log submission
Total Asset.
Financial Leverage Total debt ratio (total debt / equity ratio)

15. Published papers during the academic period
 Paper on “Earning Management and Cost of Capital” Published in English journal “Turkish
online Journal of Qualitative Inquiry (JPSQI)”
Reference
Ashiq A., Guoxing Z. & Tabassam A.,H., (2022). Earning management and Cost of Capital:
Evidence of selected non-financial firms in Pakistan. Turkish Online Journal of Qualitative Inquiry,
volume 13(1), 981-995.
 Submitted paper from:
 “Effect of managerial ability on firm performance: moderation analysis of earning quality” in
SSCI journal (Frontier in Psychology) with the impact factor 2.99.
Authors: Anam Ashiq, zhang Guoxing