Blockholders and real earnings management-the emerging markets context

Abstract

We investigate the unexplored role of large controlling shareholders (blockholders) in constraining real earnings management (REM). We examine the mechanisms through which blockholders engage with the managers to manipulate corporate earnings. We also investigate the extent to which country-level institutional and regulatory arrangements influence the blockholders ability to mitigate REM. We show that powerful family blockholders develop a coalition to manipulate the board strategic decision making in their favour which leads to a higher level of REM. Our evidence shows that the higher quality institutional and regulatory arrangements endogenously determine the better corporate financial reporting which effectively mitigates the REM.