Relation of ownership structure with earnings management in Indian context

Abstract

Earnings management is defined as “purposeful intervention in external financial reporting process, with the intent of obtaining some private gain as opposed to merely facilitating the neutral operation of the process. Because the ownership structure is considered a mechanism of corporate control, the focus of our project is to find out the extent to which this mechanism affects earnings management. Earnings management is a widely research area in the field of accounting and a lot of prior research has been done in relation to earnings management and corporate governance, firm size, auditing quality, executive compensation etc. But the effect of corporate ownership structure on earnings management is relatively unexplored in India. Our study expects to fill this void by examining the effect of ownership structure in companies on earnings management. To this end, we have examined the whether the earnings management in a firm depend on the i) the proportion of family ownership of that firm, ii) the degree of corporate board independence of Indian firms, proxied by the proportion of INEDs on corporate boards and iii) the proportion of related members on the Corporate Board of that firm. We could not validate any of our proposed hypotheses as we could not get any significant dependence/relationship of earnings management with percentage of family ownership, proportion of related members on the Corporate Board or proportion of independent nonexecutive directors on the Corporate Board from the regression analysis. The reason for this might be that there is a lot of variation in the magnitude of the predicted error term of discretionary accruals and these errors are firm dependent. It might be possible to get the results in the favor of our proposal if we repeat the same analysis with the standardized predicted errors.