Managerial Ownership Structure and Earnings Management

This study examines the relation between managerial ownership structure and earnings management. Unlike previous research which treats insiders as a homogeneous group, we further classify insiders into executives, outside directors, and blockholders to conduct an in-depth study. Earnings management is captured by discretionary accruals that are estimated using the modified Jones model. For a large sample of Taiwanese listed firms over the period 1997 and 2004, we find that discretionary accruals first increase and then decrease with executive ownership, forming an inverted U-shaped relationship. However, discretionary accruals are positively affected by director ownership and blockholder ownership. The results suggest that equity stake owned by top officers of a firm should be encouraged in order to reduce agency cost, thus enhancing information content of earnings.