Block-ownership and earnings management in Malaysian listed firms

Abstract

This study examines the association between level of block ownership and earnings management activities in Malaysian listed companies. Agency theory suggests separation of ownership and control gives rise to manager’s incentives to select and apply accounting techniques opportunistically at the expense of the shareholders. The existence of block ownership may reduce the agency cost to shareholders since block-holders are in a better position and capacity to monitor the management. Our results indicate that there is no significant relationship between the level of block-ownership and the magnitude of discretionary accounting accruals. This indicates that block-ownership is not an effective mechanism in mitigating aggressive earnings management by firms. However, further analysis indicates that institutional and holding block-ownerships are negatively related to the discretionary accruals. This suggests that institutional block and controlling block ownerships have more incentives and possess more sophisticated mechanisms to entail better control toward managerial opportunistic behaviours