Majority Shareholder Ownership and Real Earnings Management: Evidence from Korea

Abstract

Abstract This article examines the influence of majority shareholder ownership on real earnings management. It investigates whether there is a conflict between or an alignment of majority and minority shareholders' interests. If majority shareholders' interests are aligned with those of minority shareholders, a greater majority shareholder ownership lowers real earnings management. On the other hand, if they are not aligned, majority shareholders' attempts to exploit minority shareholders will increase real earnings management. This study does not find a systematic relationship between majority shareholder ownership and real earnings management. However, real earnings management significantly decreases in the upward earnings management incentive bracket as majority shareholder ownership increases. This occurs primarily because majority shareholders are more sensitive to upward real earnings management, which has a negative effect on future performance. These results suggest that the larger the ownership of majority shareholders, the more they play a positive role in mitigating real earnings management. This positive role is only effective in the post‐Asian economic crisis period. These results may suggest that the economic crisis in Korea helped majority shareholders more conscious of the long‐term costs of real earnings management. These findings support the convergence‐of‐interests hypothesis, providing evidence by investigating real earnings management instead of accruals‐based earnings management.

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