The authors thank Paul Andre, Scott Duellman, Sara Reiter and workshop participants at National University of Singapore, Singapore Management University, Southern Illinois University at Carbondale and conference participants at the American Accounting Association Annual Meeting in Anaheim, California for helpful comments. Part of the work was done while Jian Zhou was at SUNY at Binghamton and Nanyang Technological University. Jian Zhou gratefully acknowledges the research support of these universities and the Lloyd Fujie/Deloitte Foundation Professorship.
Shareholder Rights, Insider Ownership and Earnings Management
Article first published online: 21 NOV 2012
© 2012 The Authors. Abacus © 2012 Accounting Foundation, The University of Sydney
Volume 49, Issue 1, pages 46–73, March 2013
How to Cite
Huang, H. H., Wang, W. and Zhou, J. (2013), Shareholder Rights, Insider Ownership and Earnings Management. Abacus, 49: 46–73. doi: 10.1111/j.1467-6281.2012.00390.x
- Issue published online: 7 MAR 2013
- Article first published online: 21 NOV 2012
- Shareholder rights;
- Insider ownership;
- Earnings management;
- Management entrenchment
This paper examines whether shareholder rights, which enable shareholders to replace managers, can constrain earnings management, and whether this effect is conditional on the level of insider ownership. Using the comprehensive shareholder rights measure constructed by Gompers et al. (2003), we find that firms with stronger shareholder rights are associated with fewer income-increasing discretionary accruals, suggesting that stronger shareholder rights deter managers from reporting aggressive earnings. Moreover, if insider ownership introduces managerial entrenchment, managers with higher ownership would be insulated from shareholder discipline. Consistent with this entrenchment theory, we find that the association between shareholder rights and earnings management becomes insignificant in the presence of higher levels of insider ownership. Shareholder rights are negatively associated with earnings management only when insider ownership is low. Our results indicate that the disciplinary effect of shareholder rights can be attenuated by high levels of insider ownership.