Article2008

Managerial Ownership and Earnings Management: Theory and Empirical Evidence from Japan

121 citations0/0 files storedJournal of International Financial Management and Accounting

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Abstract This paper examines the relationship between managerial ownership and opportunistic managerial behavior relating to earnings management. Economics theory identifies two apparently conflicting effects of managerial ownership on managers' incentives: the incentive alignment effect and the management entrenchment effect. We construct a theoretical model demonstrating the two effects. This model suggests that as managerial ownership increases, earnings management decreases for both high and low levels of managerial ownership, while it increases for intermediate levels of managerial ownership if the sensitivity of the probability of managerial dismissal to the corporate performance is high enough and/or the manager's private benefit derived from managerial position is high enough. In a sample of Japanese firms, we find a significant nonmonotonic relationship between managerial ownership and discretionary accruals, consistent with our model.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1991Earnings Management During Import Relief Investigations 1988Management ownership and market valuation 1995Detecting Earnings Management.1985Positive Accounting Theory 1990Performance Pay and Top-Management Incentives 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 1990Additional evidence on equity ownership and corporate value

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