The monitoring role of the external ownership and discretionary accruals

Abstract

Prior studies have focused on the role that the institutional investors play to control managerial behaviours as one of the factors of the external ownership in the developed countries specifically. Nevertheless, scant attention has given to the external ownership role whether the institutional or the foreign investors to maintain the minority shareholder interest especially with the presence of the central agency problem in the emerging markets such as Jordan. Thus, this study argued the monitoring role of the external ownership factors can minimize the managerial opportunistic behaviours through examining the relationship between external ownership factors and earnings management. Earnings management proxies using the performance-adjusted discretionary accruals model (Kothari et al. 2005 model) by applying the cross-sectional method to determine model parameters for each industry in each year. In order to achieve objectives of this research a sample of 798 firm-observation of the Jordanian non-financial firms listed in ASE during the period 2009-2015 were collected. The random-effect GLS regression model is used after following the correct procedures of the panel data analysis to determine the appropriate model as stated by the results of Hausman and LM tests. Hence, the correcting robust standard errors estimates method was used since the data was suffered from the heteroscedasticity problem. The results show that the institutional ownership in Jordan plays a vital role in mitigating the opportunistic behaviours of managers. Likewise, the existence of foreign ownership in firms minimizes the level of earnings management practices. These support the hypotheses that the institutional and foreign investors are able to control the managers of the firm. Also, provide evidence about the similarities between the role of the foreign investors and the role of institutional investors since there is a shortage of the evidence about foreign investors role especially with earnings management.

Opportunistic Behavior, External Monitoring Mechanisms, Corporate Governance, and Earnings Management

“…Institutional shareholders can ensure the implementation of corporate governance practices due to their fiduciary responsibilities to the beneficial owner (OECD, 2004). Institutional ownership plays a vital role in minimizing earnings management practices within a company however, where there is a high number of institutional shareholders, earnings management practices may still occur (Ghazalat et al, 2017). The fact that institutional shareholders have control of a large portion of votes may enable them to influence corporate behavior and the decisions of the board relating to profitable long term investments (Wang et al, 2011).…”

“…This research seeks to understand the empirical result of the effect of opportunistic behavior, external monitoring mechanisms and corporate governance on earnings management practices in Indonesian companies. Accrual earnings management is a critical issue that has the ability to decrease the credibility of financial statements (Ghazalat et al, 2017). In particular, Indonesia's current economic condition means that most companies are looking to increase their capital by attracting more investors, hence, financial statements are an important tool when making investment decisions.…”