Does Public Ownership of Equity Improve Earnings Quality?

Abstract

To better understand how equity investors influence earnings quality, we compare the quality of accounting numbers produced by two types of public firms -those with publicly-traded equity and those with privately-held equity that are nonetheless considered public by virtue of having publicly-traded debt. We develop and test two hypotheses. The "demand" hypothesis holds that earnings of public equity firms are of higher quality than earnings of private equity firms due to the stronger demand by investors and creditors stemming from, among other concerns, higher litigation risk. The "opportunistic behavior" hypothesis posits that public equity firms have lower earnings quality than their private equity peers due to management intervention in the earnings process as a result of capital market considerations as well as their own equity-based compensation. We identify a number of attributes associated with the notion of earnings quality -persistence and estimation error of accruals, prevalence of earnings management, timeliness of loss versus gain recognition (conditional conservatism) and the extent of conservatism due to the use of asset-decreasing accounting principles (unconditional conservatism). The results indicate that, consistent with the "opportunistic behavior" hypothesis, private-equity firms have higher quality accruals and a lower propensity to manage income than public equity firms. However, in line with the "demand" hypothesis, public equity firms' financial reports are generally more conservative.

Audit Quality and Earnings Management among Nigerian Listed Deposit Money Banks

“…Auditor Independence (β 4 =0.6010025; z=4.96; p-value at 0.008<0.01) β 4 is 0.6010025 and shows that for every one unit increase in auditor independence, earnings management increases by 0.6010025. Since auditor independence as one of the independent variables identified as a determinant is statistically significant to earnings management, we conclude that auditor independence is a significant determinant of earnings management in Nigerian listed deposit money banks.…”

“…Earnings quality is a broader term that scientists interpret differently, depending on the specific situation is applied. McNichols [3] described earnings quality as elusive in the sense that extant literature only identifies diverse characteristics associated with it [4]. Dechow et al [5] believed that earnings quality provide more information about the features of a firm's financial performance that are relevant to specific decisions made in the organizations.…”

The Influence of Corporate Governance in Chinese Companies on Discretionary Accruals and Real Earnings Management

“…One line of research focuses on the empirical correlation between ownership structure and earnings quality. It includes studies, for instance, Fan and Wong (2002), Jung and Kwon (2002), Siregar and Utama (2008), Givoly et al (2009) and Xu et al (2012). Another line of research examines the relation between board characteristics and earnings equality, such as Vafeas (2000), Klein (2002), Park and Shin (2004), Osma (2008) and Dimitropoulos and Asteriou (2010).…”

Family Firms and Financial Analyst Activity

“…Additionally, the risk of damaging the reputation, wealth, and long-term value of the firm leads large shareholders to forgo the short-term benefits of engaging in opportunistic behavior such as managing earnings (Wang (2006)), and increases their incentive to remain well informed about the firm's activities (Klein (2002)). These concerns also favor voluntary disclosure (Chen et al (2008)) and warnings about bad news (Ali et al (2007)) in order to mitigate the possibility of negative earnings surprises or potential lawsuits (Givoly et al (2010)). …”

“…In this setting, large shareholders have incentives to manipulate accounting information and manage earnings for their own benefit (Wang (2006)), which leads to lower-quality earnings (Hope et al (2013)). Entrenched large shareholders might withhold bad news to reduce scrutiny of their private benefits extraction (Ali et al (2007)) and hide their opportunistic behavior (Givoly et al (2010)). Furthermore, large shareholders might perceive sharing private information with external investors as not very beneficial, leading them to keep it internal while providing outside parties with low-quality accounting information (Fan and Wong (2002a)).…”