Strengthening corporate governance: Military experience on boards and audit quality in earnings management

Abstract Firm connections of board members have long been a focal point for economists in developed and developing countries. The connections through boards of directors can prove valuable, as connected directors provide support and essential knowledge about public policies to the firm. However, generalizing the effects of board connections on firm dynamics based on previous cross-country studies is challenging due to differing political scenarios and regulatory conditions across nations. Therefore, this study investigates the role of military connections earnings management in non-financial firms listed on the Pakistan Stock Exchange from 2010 to 2022. By focusing on accrual-based and real earnings management, the research demonstrates that military-affiliated directors significantly reduce earnings manipulation due to their discipline, ethical standards, and adherence to governance principles. This study concludes that the audit quality used as a moderating variable further strengthens the integrity of financial reporting, suggesting that the Big Four auditors further exhibit reductions in earning manipulations. Overall, this study contributes by extending upper echelons theory to show how military experience, characterized by discipline and monitoring, constrains both accrual-based and real earnings management. It further highlights the interaction of military directors with external audit quality, forming a dual safeguard against manipulation. Finally, by focusing on Pakistan, the study enriches understanding of governance in emerging markets where institutions are weaker and monitoring roles of directors are crucial.