Ownership Structures, Corporate Governance and Earnings Management in the European Oil Industry

Abstract:     
In this paper we investigate the impact of corporate governance and ownership structure variables on earnings management in the European oil industry. We used quarterly data and a panel data methodology. The findings show non-linear relationships among institutional investors ownership and governmental ownership with the magnitude of earnings management. For institutional investors ownership we found a positive association within lower levels of ownership (consistently with the short-term transient view of institutional investors shareholding) and a negative association within higher levels of ownership (consistently with the long-term orientation view of institutional investors, playing a monitoring role over the company’s financial performance). For governmental ownership, we found that a positive association within lower levels of ownership, consistently with the incentives for oil companies to avoid closer political scrutiny on the reported results (political costs hypothesis). We found a negative association with earnings management magnitude in firms where governments are the controlling shareholders or a large blockholders. The findings also show that relevant governance variables, such as the proportion of independent directors, the audit committees size and meeting frequency, contribute to constrain earnings management. Overall, the results suggest that key variables related to ownership and governance structures impact on earnings management across different national settings and governance systems. Moreover, the relationship of ownership structures with earnings management appears to be complex and varying at different levels of ownership. This study could have several practical implications. Firstly, accountability and stricter control could be two issues for firms where governments are shareholders that engages in earnings management practices. Secondly, higher participation of institutional investors in the ownership and in the governance may be an effective monitoring device over earnings manipulation. Finally, the homogeneous results could mean that governance practices are more integrated at an European level than the national governance models and codes’ recommendations are.

Number of Pages in PDF File: 23

Keywords: earnings management, ownership structures, corporate governance

JEL Classification: M41, G3

working papers series