Private Control Benefits and Earnings Management: Evidence from Insider Controlled Firms

Abstract

We examine earnings management practices of insider controlled firms across 22 countries to shed light on the link between consumption of private benefits and earnings management. Insider controlled firms are associated with more earnings management than noninsider controlled firms in weak investor protection countries. Consistent with the private benefits motive, insider controlled firms with greater divergence between cash‐flow rights and control rights are associated with more earnings management in these countries. Growth opportunities attenuate the association between insider control and earnings management even in weak investor protection countries. We also find some weak evidence that insider controlled firms are associated with less earnings management in strong investor protection countries. Overall, our results highlight a strong link between private benefits consumption and earnings management.

The Joint Effect of Audit Quality and Legal Regimes on the Use of Real Earnings Management: International Evidence

“…The coefficient on DIV is positive and significant in the AEM (REM) regression when the legal regime stringency is measured by LAW1 ( LAW2 ), and insignificant in other columns. The results in column (4) (i.e., in the REM regression with LAW2 ) are consistent with our earlier evidence in Table and results in prior research (Haw et al ; Gopalan and Jayaraman ).…”

“…Two competing predictions exist regarding the effect of legal regimes on REM. Previous research shows that the magnitude of accrual‐based earnings management (AEM) decreases as the country‐level legal regime strengthens because effective investor protection weakens managerial incentives to manipulate earnings via AEM (e.g., Gopalan and Jayaraman ; Haw et al ). In a similar vein, one can predict that the magnitude of REM decreases as the legal regime becomes stronger.…”

Corporate governance and the Indian institutional context: Emerging mechanisms and challenges

“…When asked to quantify RPTs as a percentage of sales, 67% (20%) of firms with RPTs reported that RPTs were at least 1% (5%) of revenue. In a later study covering data of 4517 unique firms from 22 countries across Europe and Asia, Gopalan and Jayraman (2012) confirm tunnelling activities in insider controlled 43 corporations and report that such companies operating in low investor protection countries are associated with more earnings management than their non-insider controlled counterparts and that the extent of earnings management within insider controlled firms was increasing in the extent of divergence between cash flow rights and control rights. In a related vein, George and Kabir (2008) report evidence of profit redistribution among firms affiliated to Indian Business Groups.…”

“…Such diversion takes the form of "looting" (La Porta et al, 2003). Even when business groups do not have an in-house bank as is the case in countries such as India, Gopalan, Nanda, and Seru (2008) document the use of internal capital markets wherein intra-group loans among the firms affiliated to a group serve as a channel for transfer of financial resources between business group firms. agency costs.…”

GABP Neural Network Algorithm Applied in Evaluation of Computer Network Security

“…Clustering coefficient is called clustering coefficient, it measure extent network group and crucial parameter [12,13]. In terms of social networks, the group is a very important form of clustering coefficient characteristics, the group is also known as the cluster phenomenon, for which scientists are clustering coefficient of concepts presented [14].…”