Earnings Management in the UK: The Impact of Managerial Share Ownership and Minority Shareholder Protection on Discretionary Accruals

33 Pages Posted: 28 Jan 2011 Last revised: 2 Nov 2017

See all articles by Sebastian Bos

Sebastian Bos

University of York - The York Management School; KPMG Luxembourg

Andrew Pendleton

University of York (UK)

Steve Toms

University of Leeds - Leeds University Business School (LUBS); University of Leeds - Division of Accounting and Finance

Date Written: January 14, 2013

Abstract

The paper examines the relationship between share ownership by boards of British stock exchange listed companies and accrual based earnings management. It provides the first empirical evidence that the relationship is impacted by UK Company Law and the institutional governance framework.

We specifically model nonlinear relationships between the equity stakes owned by executive directors and discretionary accruals to account for managerial alignment-incentive and entrenchment at different levels of share ownership. To explain the nonlinear relationship, we discuss the UK institutional governance framework and highlight key regulatory thresholds. Piecewise linear regressions test the impact of these key regulatory thresholds on the earnings management-ownership relationship.

We find that share ownership by executive directors has a significant impact on the level of discretionary accruals. The relationship is negative when the equity stakes of executive directors are below the 5% threshold of the ABI dilution limit and sections 376-378 of Companies Act 1985. Earnings management increases above 5% and below 10% of share ownership by executives. Once the 10% equity threshold of section 209 of Companies Act 1948 is reached, executive share ownership effectively mitigates accrual based earnings management. We find no evidence that equity ownership by non-executive directors mitigates earnings management practice of British companies.

Keywords: earnings management, managerial share ownership, discretionary accruals, UK company law, minority shareholder protection

JEL Classification: M41, M43, G32, G34

Suggested Citation

Bos, Sebastian and Pendleton, Andrew and Toms, Steve, Earnings Management in the UK: The Impact of Managerial Share Ownership and Minority Shareholder Protection on Discretionary Accruals (January 14, 2013). Available at SSRN: https://ssrn.com/abstract=1747919 or http://dx.doi.org/10.2139/ssrn.1747919

Sebastian Bos

University of York - The York Management School ( email )

Freboys Lane
Heslington
York, North Yorkshire YO10 5GD
United Kingdom

KPMG Luxembourg ( email )

9, allée Scheffer
Luxembourg, L-2520
Luxembourg

Andrew Pendleton

University of York (UK) ( email )

Heslington
York YO10 5DD
United Kingdom

Steve Toms (Contact Author)

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

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