How efficient ownership structure monitors income manipulation? Evidence of real earnings management among Malaysian firms

Abstract

This study investigates income manipulation through real earnings management, by listed companies in Malaysia, prior to being officially designated as “financially distressed”, by this country’s stock exchange listed rules. The hypotheses relate to whether the degree of upwards real earnings management, conducted during the four-year period prior to financial distress, can be explained by ownership structure (measured with three variables: managerial ownership, institutional ownership and foreign ownership). Using a sample of 1180 firm-year observations of financially distressed companies, over the investigation period 2001–2011, the findings suggest that the degree of real earnings management is not associated with ownership by management or institutional investors. Conversely, the evidence indicates that foreign shareholders are able to constrain upwards real earnings management related to discretionary expenditure but not the operating cycle. This study contributes to the importance of diversity of ownership structures in monitoring income manipulation among firms.