Private Control Benefits and Earnings Management: Evidence from Insider Controlled Firms

Authors

  • RADHAKRISHNAN GOPALAN,

    1. Olin Business School, Washington University, St. Louis. We thank Phil Berger (the editor), an anonymous referee, Utpal Bhattacharya (AFA discussant), Richard Frankel, Michelle Hanlon, and seminar participants at the 2011 Annual Finance Association (AFA) meeting and MIT (Sloan) for helpful comments. We are also grateful to Mara Faccio for sharing data on ownership structure of business groups in Europe and to Stijn Claessens, Simeon Djankov, and Larry H.P. Lang for sharing the data on ownership structure of group firms in Asia through the Journal of Financial Economics Web site.
    Search for more papers by this author
  • SUDARSHAN JAYARAMAN

    1. Olin Business School, Washington University, St. Louis. We thank Phil Berger (the editor), an anonymous referee, Utpal Bhattacharya (AFA discussant), Richard Frankel, Michelle Hanlon, and seminar participants at the 2011 Annual Finance Association (AFA) meeting and MIT (Sloan) for helpful comments. We are also grateful to Mara Faccio for sharing data on ownership structure of business groups in Europe and to Stijn Claessens, Simeon Djankov, and Larry H.P. Lang for sharing the data on ownership structure of group firms in Asia through the Journal of Financial Economics Web site.
    Search for more papers by this author

ABSTRACT

We examine earnings management practices of insider controlled firms across 22 countries to shed light on the link between consumption of private benefits and earnings management. Insider controlled firms are associated with more earnings management than noninsider controlled firms in weak investor protection countries. Consistent with the private benefits motive, insider controlled firms with greater divergence between cash-flow rights and control rights are associated with more earnings management in these countries. Growth opportunities attenuate the association between insider control and earnings management even in weak investor protection countries. We also find some weak evidence that insider controlled firms are associated with less earnings management in strong investor protection countries. Overall, our results highlight a strong link between private benefits consumption and earnings management.

Ancillary