Insider Control, Group Affiliation and Earnings Management in Emerging Economies: Evidence from India

59 Pages Posted: 9 Jan 2013

See all articles by Jayati Sarkar

Jayati Sarkar

Indira Gandhi Institute of Development Research (IGIDR)

Subrata Sarkar

Indira Gandhi Institute of Development Research

Kaustav Sen

Pace University - Lubin School of Business

Date Written: January 8, 2013

Abstract

Using a sample of group affiliated and standalone firms for the years 2001-06 from India, a large emerging economy dominated by family business groups and firms with concentrated ownership, we examine the relationship between insider control and opportunistic earnings management with specific focus on the effect of business group affiliation on this relationship. We test the alignment and the entrenchment hypotheses by examining opportunistic earnings management. We further examine if such behavior is influenced by the complexity of ownership structures that are manifested in incomplete and fragmented information about ownership stakes. Our results indicate that a non-linear U-shaped relationship exists between insider control and opportunistic earnings management and that this relationship is stronger for group affiliated firms as compared to that for standalones. Finally, incomplete and fragmented ownership information is found to be strongly related to opportunistic earnings management in group affiliated firms. Our results highlight that both insider control and group affiliation may independently influence agency costs in emerging economies. This in turn calls for policy actions that focus not only on individual firms but on business groups as consolidated identities.

Keywords: corporate governance, ownership structures, regulation, earnings management

JEL Classification: G32, G34, G38, M41

Suggested Citation

Sarkar, Jayati and Sarkar, Subrata and Sen, Kaustav, Insider Control, Group Affiliation and Earnings Management in Emerging Economies: Evidence from India (January 8, 2013). Pace University Accounting Research Paper No. 2013/02. Available at SSRN: https://ssrn.com/abstract=2197713 or http://dx.doi.org/10.2139/ssrn.2197713

Jayati Sarkar

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India
91-22-8400919 (Phone)
91-22-8402752 (Fax)

Subrata Sarkar (Contact Author)

Indira Gandhi Institute of Development Research ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

Kaustav Sen

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212 618 6413 (Phone)
212 618 6410 (Fax)

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