Abstract
This paper analyses the impact of both, the ownership structure features and the institutional settings, on real-based activities manipulation based on a sample of listed companies in the underexplored Latin American market for the period of 2004–2016. Using panel data based-GMM system estimator technique, the results confirm some previous literature that the monitoring role of the majority owner is crucial in mitigating the opportunistic behavior of managers in engaging in real activities manipulation that reduces the informative content of financial statements. However, the analysis of the insider ownership revealed the negative impact on transparency that entrenched managers cause. In this case, we observed that as insider ownership increases, managers engage more actively in real earnings management. Other corporate governance tools like the institutional ownership and the quality of the regulatory system demonstrated to be effective mechanisms in reducing the real activities manipulation. Taken together, our results mean that in institutional settings characterized by weak protection of the investors and possible conflicts of interests among shareholders, the oversight by majority shareholder in conjunction with the legal and regulatory framework becomes an important governance mechanism that reduces the managerial discretionary decision making concerning the quality of reported earnings.
Highlights
This article analyses the effect of the ownership structure features and the institutional characteristics on real activities manipulation, known as real earnings management
The p-values are reported in the last column, and through these we strongly reject the null hypothesis that mean values are equal to zero, meaning that the Latin American companies included in our sample overstate their financial statements through real activities manipulation, on average
We analysed the impact of several ownership structure features as well as the characteristics of the institutional setting and regulatory framework in constraining the discretionary capacity of managers to misreport the earnings
Summary
This article analyses the effect of the ownership structure features and the institutional characteristics on real activities manipulation, known as real earnings management. Contrary to prior literature which focused mainly on accruals-based manipulation as the sole method to mould earnings figures in developed countries, in this study we examine whether corporate governance variables can control real activities manipulation in Latin America as a sample of an unresearched emerging market region. The most important results confirm some previous literature in showing that the control-enhancing role of the majority owner is crucial in mitigating the opportunistic behaviour of managers from engaging in real activities manipulation which reduces the informative content of financial statements (see for instance the study of Goh, Lee, & Lee (2013) for Korean firms). Results are discussed and in section five, we list the major conclusions
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