Purpose This paper investigates the impact of shareholder activism on the constraint of earnings management (EM) in an emerging market and examines how this relationship is moderated by CEO narcissism and audit quality (adq). The study focuses on Pakistan, characterized by concentrated ownership and fragmented governance enforcement, and offers novel insights into the role of institutional mechanisms in enhancing financial reporting quality. Design/methodology/approach A random-effects model is employed to analyze a panel dataset of non-financial firms listed on the Pakistan Stock Exchange (PSX-100) over the period 2013–2023. Variance inflation factor diagnostics and heteroskedasticity tests are used to assess the validity of the model assumptions. The analysis incorporates multiple estimation techniques, including dynamic system GMM, and applies alternative proxy measures for EM and the moderating variables to ensure robustness. Findings Shareholder activism has a negative relationship with EM, suggesting that both blockholder and institutional ownership help curb opportunistic financial reporting. Narcissism in the CEO weakens the role of monitoring, while better adq strengthens it. These mechanisms jointly shape the effectiveness of shareholder activism in constraining EM under weak enforcement conditions. Practical implications The results indicate that greater shareholder empowerment and improved external audit practices are necessary to enhance reporting transparency, protect minority investors and reduce the cost of capital in emerging markets. Regulators and investors should also consider how executive behavioral traits influence the effectiveness of mechanisms designed to constrain EM. Originality/value The study advances the corporate governance literature by synthesizing agency theory, upper-echelons theory and institutional theory to explain the interplay among shareholder activism, CEO psychological characteristics and audit credibility in shaping financial reporting outcomes in an emerging economy. It provides new evidence from Pakistan, where these dynamics remain poorly understood.
Bangash et al. (Tue,) studied this question.