Board of Directors’ Interest in Share Ownership and Earnings Management

Authors

  • Philip Jehu Department of Accounting and Business Administration, Federal University Kashere, Gombe, Nigeria
  • Mohammad Azhar Ibrahim Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia

DOI:

https://doi.org/10.52962/ipjaf.2019.3.1.63

Keywords:

Earnings Management, Board of Directors, Ownership, Interest, Nigeria

Abstract

In this study, we examine the effect of directors’ ownership on earnings management practices. Explicitly, we draw from the agency theory to distinguish between ownership by non-executive directors and ownership by executive directors to investigate reasons for directors and managerial opportunistic behaviour. Utilising data from a sample of 864-firm-year observations ranging from 2009 to 2017 period, we test our hypothesis through OLS regression. We find that non-executive directors’ interests in shareholding are significantly associated with higher levels of earnings management. We observed a decrease in abnormal accruals on the overall basis of the combined ownership of both executive and non-executive directors. Overall, ownership by all directors combined significantly reduces managerial opportunism. By contrast, there is no evidence that executive directors’ ownership mitigates managerial opportunism. This paper contributes to corporate governance literature, particularly when the independence of board members is essential. This study disaggregates board ownership into executive holdings and non-executive holdings, dimensions which were hitherto rendered as managerial ownership or board ownership. These findings imply firms’ corporate governance policy and regulations.

Downloads

Download data is not yet available.

References

Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. F. (2016). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), 3–40. http://doi.org/10.1111/1475-679X.12099
Alves, S. (2012). Ownership structure and earnings management: Evidence from Portugal. Australian Accounting Business and Finance Journal, 6(1), 57–74. http://doi.org/10.5539/ijbm.v7n15p88
Alzoubi, E. S. S. (2014). Board characteristics and financial reporting quality: Evidence from Jordan. Corporate Ownership and Control, 11(3), 8–29. http://doi.org/10.5296/ajfa.v4i1.1442
Dechow, P. M., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2–3), 344–401. http://doi.org/10.1016/j.jacceco.2010.09.001
Ebrahim, A. (2007). Earnings management and board activity: additional evidence. Review of Accounting and Finance, 6(1), 42–58. http://doi.org/10.1108/14757700710725458
Francis, B., Hasan, I., Park, J. C., & Wu, Q. (2015). Gender differences in financial reporting decision-making: evidence from accounting conservatism. Contemporary Accounting Research, 32(3), 1285–1318. http://doi.org/10.2139/ssrn.2377312
Hooghiemstra, R., Hermes, N., Oxelheim, L., & Randøy, T. (2019). Strangers on the board: The impact of board internationalization on earnings management of Nordic firms. International Business Review Journal, 28, 119–134. http://doi.org/10.2139/ssrn.2714428
Klein, A. (2002). Audit committee, the board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375–400. http://doi.org/10.1016/S0165-4101(02)00059-9
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163–197. http://doi.org/https://doi.org/10.1016/j.jacceco.2004.11.002
O’Callaghan, S., Ashton, J., & Hodgkinson, L. (2018). Earnings management and managerial ownership in private firms. Journal of Applied Accounting Research, 19(4), 648–668. http://doi.org/doi.org/10.1108/JAAR-11-2017-0124
Peasnell, K. V., Pope, P. F., & Young, S. (2005). Board monitoring and earnings management: Do outside directors influence abnormal accruals? Journal of Business Finance and Accounting, 32(7–8), 1311–1346. http://doi.org/10.1111/j.0306-686X.2005.00630.x
Ran, G., Fang, Q., Luo, S., & Chan, K. C. (2015). Supervisory board characteristics and accounting information quality: Evidence from China. International Review of Economics & Finance, 37, 18–32. http://doi.org/10.1016/j.iref.2014.10.011
Sharon, P. K. (2009). Earnings quality and ownership structure: The role of private equity sponsors. The Accounting Review, 84(3), 623–658. http://doi.org/10.2307/27784189
Teshima, N., & Shuto, A. (2008). Managerial ownership and earnings management: Theory and empirical evidence from Japan. Journal of International Financial Management and Accounting, 19(2), 107–132.
Tessema, A., Kim, M. S., & Dandu, J. (2018). The impact of ownership structure on earnings quality: The case of South Korea. International Journal of Disclosure and Governance, 15(3), 129–141. http://doi.org/10.1057/s41310-018-0039-x
Ujunwa, A., Okoyeuzu, C., & Nwakoby, I. (2012). Corporate board diversity and firm performance?: Evidence from Nigeria. Revista de Management Comparat International, 13(4), 605–620. Retrieved from https://search.proquest.com/docview/1355867187?pq-origsite=gscholar
Vafeas, N. (2005). Audit committees, boards, and the quality of reported earnings. Contemporary Accounting Research, 22(4), 1093–1122. http://doi.org/10.1506/1QYN-2RFQ-FKYX-XP84
Waweru, N. M., & Prot, N. P. (2018). Corporate governance compliance and accrual earnings management in eastern Africa: Evidence from Kenya and Tanzania. Managerial Auditing Journal, 33(2), 171–191. http://doi.org/http://dx.doi.org/10.1108/MRR-09-2015-0216

Downloads

Published

2019-01-01

Issue

Section

Main Section

How to Cite

Board of Directors’ Interest in Share Ownership and Earnings Management. (2019). Indian-Pacific Journal of Accounting and Finance, 3(1), 33-40. https://doi.org/10.52962/ipjaf.2019.3.1.63

Similar Articles

11-20 of 67

You may also start an advanced similarity search for this article.