Do Ownership Structure Characteristics Affect Italian Private Companies’ Propensity to Engage in the Practices of “Earnings Minimization” and “Earnings Change Minimization”?

Abstract

The study aims to verify whether and how ownership structure (with specific reference to ownership concentration and identity) affects Italian private (unlisted) companies' propensity to engage in practices of "earnings minimization" and "earnings change minimization". Companies that engage in these practices have been identified following the "earnings frequency distribution" approach suggested by Burgstahler and Dichev (1997). The influence of ownership structure, together with that of a set of control variables mainly aiming to control for tax, financial, and size incentives, is tested by logit analysis models. Ownership concentration does not have a statistically significant influence. Conversely, institutional, state, and foreign ownership has a statistically significant influence. In the first and third cases, the influence is negative, in the second case the influence is positive. The study extends the current knowledge on the relationship between aspects of corporate governance and earnings management practices in private companies, especially SMEs. It also expands what is known about the earnings management practices undertaken by companies in countries, like Italy, in which a code law system is in force and accounting and tax systems are closely aligned.

Earnings Management and State Ownership: A Primary Literature Review

“…Evidence of a positive relationship has also been found in Italy. Poli (2015) published a study conducted on a sample of 13,724 unlisted companies working in different sectors between 2012-2014 and measuring earnings management through the results distribution method developed by Burgstahler and Dichev (1997). The author concludes by confirming the existence of a positive relationship between public ownership and earnings management.…”

Is gender diversity in ownership structure related to private Italian companies propensity to engage in earnings management practices?

“…The earnings change frequency distributions conditional on FEM are shown in Figure 2. Each histogram in Figure 2 presents peaks of observations in correspondence to the first negative interval -1, corresponding to the range (-0.00250-0), and to the first positive interval 1, corresponding to the range (0-0.0025) and a marked discontinuity both to the left of the first negative interval and to the right of the first positive interval, that are the typical characteristics of earnings management practices aiming to minimize earnings changes (Coppens and Peek, 2005;Poli, 2013bPoli, , 2015a. Table 5 shows the test statistics suggested by Burgstahler and Dichev (1997).…”

“…ECM, on the other hand, is signaled by the presence of discontinuities between the second negative earnings change interval and the first negative earnings change interval and between the first positive earnings change interval and the second positive earnings change interval of the earnings change frequency distribution (Coppens and Peek, 2005;Poli, 2013aPoli, , 2015a. A discontinuity emerges if the number of the observations falling in a given interval of the frequency distribution is significantly higher than expected and if the number of the observations falling in one or both of the immediately adjacent intervals of the frequency distribution is significantly lower than expected.…”

“…A set of control variables is included in order to control for the influence of those factors that previous studies have found to affect companies' propensity to engage in EM and ECM (Baralexis, 2004;Burgstahler and Dichev, 1997;Marques et al, 2011;Moreira, 2006;Poli, 2013bPoli, , 2015a: company size (SIZE), financial incentives (BANK), fiscal incentives (ATR), previously displayed behavior (EM1previous and EM2previous), and industry sector (SECTOR). Consistent with the findings of previous studies, it is expected that the coefficients of all the control variables are positive and statistically significant.…”

“…Companies practice EM when they manage earnings to bring them close to zero (Coppens and Peek, 2005;Marques et al, 2011;Poli, 2013aPoli, , b, 2015a. They practice ECM, instead, when they manage earnings to avoid large earnings changes or, in other words, to smooth earnings (Coppens and Peek, 2005;Poli, 2013aPoli, , 2015a.…”