Corporate Ownership Structure and the Informativeness of Earnings

Abstract

This study extends prior studies by examining how managerial ownership and external unrelated blockholdings affect the informativeness of earnings. The results are in contrast to prior studies. A non-linear relation exists between managerial ownership and earnings informativeness. Earnings informativeness increases with managerial ownership at low levels but not at higher levels of managerial ownership where the entrenchment effect sets in. Consistent with the role of large shareholder monitoring, the evidence shows a strong positive relationship between external unrelated blockholdings and earnings informativeness. These results are supported when income-increasing and absolute discretionary accruals are used to measure the extent of earnings management Copyright Blackwell Publishers Ltd 2002.

Does Corporate Governance Influence Earnings Management in Latin American Markets?

“…Our result is in line with those obtained by Machuga and Teitel (2009) with a sample of Mexican firms, who show that firms with less internal ownership show a greater earnings quality compared to those that do not have managerial ownership, i.e., shows less manipulative practices by managers, because of the implementation of good CG practices contained in Codes of Best Practices. Likewise, other studies such as Morck et al (1988) in Canada, Wartfield et al (1995) in the US, Yeo et al (2002) in Singapore and Sanchez-Ballesta and Garcia-Meca (2007) in Spain, also point out that the informativeness of accounting results increases with low levels of internal ownership, while for a high levels, the internal ownership is not sufficient as a mechanism of interest alignment.…”

“…Thus, since previous studies have found non-linearities which support both the convergence-of-interests and the entrenchment hypotheses in different ownership intervals (Morck et al 1988;Yeo et al 2002), we examine the possible non-linearities in the relation between insider ownership and discretionary accruals. In Table 5, model (12), we test the non linear effect of insider ownership (Int_OWN and Int_OWN2) on earnings management along with the other governance and control variables.…”

“…Large shareholders play a key role in internal control of companies, because the volume of participation encourages them to monitor and influence the strategy of the firm in which they have invested (Fernandez 1998;Yeo et al 2002;Gabrielsen et al 2002). This means that a greater ownership concentration should, according to the efficient monitoring hypothesis (Jensen and Meckling 1976), lead to a less opportunistic behavior and a greater tendency to maximization the value of the firm (Fama 1980;Fama and Jensen 1983), having a positive impact on the informativeness of accounting earnings, since increasing the participation of the controlling shareholder reduces the incentives of this owner to expropriate the wealth of minority shareholders (De Miguel et al 2004;Boubraki et al 2005).…”

“…In this sense, De Bos and Donker (2004) point out that increased ownership is an effective CG mechanism in monitoring accounting decisions taken by management and implies a higher earnings quality. Yeo et al (2002) deal with the monitoring role played by external unrelated block holders, which reduces the opportunities of earnings management, and de Bos and Donker (2004) also show that increased ownership concentration is an effective corporate governance mechanism in monitoring accounting decisions of incumbent management, such as voluntary accounting changes. However, when the level of ownership concentration is too high it can lead to agency problems due to the expropriation of the minority shareholders' interests (Boubraki et al 2005;Lefort 2007).…”

“…We use the cross-sectional version of the modified Jones (1991) model to estimate the nondiscretionary component of total accruals (TAC) (DeFond and Jiambalvo 1991; Yeo et al 2002).…”