Abstract
This article analyses the impact of ownership structure features and institutional settings on real activities manipulation. The analysis is based on a sample of listed companies in the underexplored Latin American market for the period of 2004–2016. Panel-data-based G.M.M. System Estimation is used in the empirical analysis. The results confirm that the monitoring role of the majority owner is crucial in mitigating managerial opportunistic behaviour. Here, opportunistic behaviour refers to engaging in real activities manipulation that reduces the informative content of financial statements. However, analysis of insider ownership revealed that managers had a negative impact on transparency. We observed that as insider ownership increases, managers engage more actively in real earnings management. We also find that the institutional ownership and the quality of the regulatory system proved to be effective mechanisms in reducing real activities manipulation.
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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