Modeling the Relationship Between CEO Stock Ownership and at-IPO Discretionary Earnings Management

Abstract

We develop the thesis that the relationship between CEO stock ownership and at-IPO discretionary earnings management is U-shaped, with too little stock ownership being as bad for reducing earnings management as is too much stock ownership. We also argue that ownership dispersion within the firm's board moderates the relationship. When firm ownership is evenly dispersed within director groups, the U-shaped relationship will become inverted-U due to board monitoring and reduced CEO power. Conversely, when ownership is not evenly dispersed, we expect that ownership concentration in the VC will especially strengthen the U-shaped association. Testing from a sample of 266 firms that completed an IPO provides support for the thesis and the associated hypotheses. Our theory and findings hold a host of novel implications for understanding the consequences of CEO as well as director stock ownership on managerial opportunism in various organizational settings.