Article2018

The impact of pyramid ownership on earnings management

26 citations0/0 files storedAsian Review of Accounting

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

Abstract

Purpose Unlike firms listed in the USA, many large firms in Canada belong to business groups organized as pyramids. A pyramidal structure refers to a business group that consists of a set of enterprises or other entities and displays a top-down chain of control. The purpose of this paper is to investigate the relationship between pyramid ownership and earnings management. Design/methodology/approach The paper is an empirical study using a sample of 165 Canadian listed firms from 2010 to 2015. The impact of pyramid ownership on both accrual-based and real earnings management is examined. Findings The findings show that pyramid-affiliated firms engage in less accrual-based and real earnings management than non-pyramid-affiliated firms. The results further show that the divergence between control rights and cash flow rights of the controlling shareholders in the pyramid-affiliated firms is positively related to real earnings management. Moreover, the results highlight that intra-group transactions (other than internal financing) among pyramid-affiliated firms lead to higher level of both accrual-based and real earnings management, but internal financing is negatively associated with real earnings management. Overall, this study provides the evidence which indicates that pyramid ownership structure and earnings management are related to each other. Originality/value The paper contributes to the earnings management literature by studying the impact of pyramid ownership structure on earnings management, especially real earnings management.

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References

1983Separation of Ownership and Control 1997A Survey of Corporate Governance 1999Corporate Ownership Around the World 2005Performance matched discretionary accrual measures 2005The economic implications of corporate financial reporting 1985The Structure of Corporate Ownership: Causes and Consequences 2003Earnings Management through Real Activities Manipulation 1983The market for corporate control

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