Mitigating effect of foreign ownership in the relationship between Default Risk and Earning Response Coefficient (ERC)

Abstract

This research shows whether foreign ownership mitigate the relationship between default risk and earning response coefficient (ERC) while controlling the determinants of ERC (beta, size, growth and earning persistence). The study selected 250 non-financial firms of different sectors on the basis of purposive sampling technique which are enlisted in Pakistan stock exchange (PSX) for the time periods of eight years ranging from 2008 to 2015. Using reverse regression, it has been observed through statistical analysis that Beta is negatively related to ERC while others determinants (Growth, Size and Earning Persistence) are positively related to ERC.As for as foreign ownership and its effects on the relationship between default risk and ERC is concerned, the statistical result confirmed the
hypothesis that there exist negative and significant association which means that foreign ownership does not mitigates or decreases the effect of default risk on the ERC. These results are consistent with Gurbuz & Aybrs (2010) who argued that foreign investors have negligible stake apart from good returns to affect the default risk and ERC relationship. So large foreign ownership companies may unlikely to positively affect the relationship between default risk and ERC in emerging economy of Pakistan. However, other researchers like Bloamstrom & Kokko (1998) and Chhiber & Majumdar (1999) conducted studies in developed countries have documented that foreign ownership positively effect the relationship between default risk and ERC.This study contributes to the literature and has great importance as no prior study exists in emerging economy of (Pakistan) on the association of foreign ownership, default risk and earning response coefficient (ERC).