The Influence of a Company’s Ownership Structure on Upward Real Earnings Management

Andrzej Piosik,Ewa Genge

doi:10.3390/su12010152

Abstract

Financial transparency, including transparency of transactions, is one of the pillars of sustainability. This study investigates whether a company’s ownership structure, including ownership concentration, managerial ownership, and the presence of institutional investors, affects upward real earnings management practices. The research is based on companies listed on the Warsaw Stock Exchange in Poland adapting panel data regression models. The significance and contribution to literature of the paper lies in the fact that we provide evidence that the association between the magnitude of total upward real earnings management and shareholder concentration is U-shaped, thereby indicating that there is an optimal level of ownership concentration, minimizing the magnitude of upward real earnings management and thus increasing financial transparency. Our results show the negative relationship between total upward real earnings management and managerial ownership, thereby we confirm the alignment of interest hypothesis, in terms of real earnings management. We also confirm that individual instruments of real earnings management are linked to ownership concentration and managerial ownership in specific ways. The presence of institutional investors reduces the magnitude of total upward real earnings management.

Highlights

This study investigates whether a company’s ownership structure, including ownership concentration, managerial ownership, and the presence of institutional investors, affects upward real earnings management practices
We checked whether abnormal cuts in discretionary expenses, acceleration of revenue, increases in production costs, or all of these activities considered together are correlated with the ownership structure
The same relationship was observed among abnormal cuts in selling, general, and administrative expenses and the measure of ownership concentration

Summary

Introduction

This study investigates whether a company’s ownership structure, including ownership concentration, managerial ownership, and the presence of institutional investors, affects upward real earnings management practices To accomplish this goal, we checked whether abnormal cuts in discretionary expenses (including selling, general and administrative expenses, and expired research and development costs), acceleration of revenue, increases in production costs, or all of these activities considered together are correlated with the ownership structure. We checked whether abnormal cuts in discretionary expenses (including selling, general and administrative expenses, and expired research and development costs), acceleration of revenue, increases in production costs, or all of these activities considered together are correlated with the ownership structure This issue is closely connected to the importance of the ownership structure and its impact on the monitoring activities, financial transparency, and the development of the firm. The association between ownership concentration and earnings management has been analyzed from two perspectives, namely, the efficient monitoring hypothesis and the expropriation hypothesis [5,6]

Objectives

Results

Discussion

Conclusion