Shareholder Rights, Insider Ownership and Earnings Management

28 Pages Posted: 9 Mar 2013

See all articles by Henry He Huang

Henry He Huang

Yeshiva University - Sy Syms School of Business

Weimin Wang

Saint Louis University

Jian Zhou

University of Hawaii at Manoa

Date Written: March 2013

Abstract

This paper examines whether shareholder rights, which enable shareholders to replace managers, can constrain earnings management, and whether this effect is conditional on the level of insider ownership. Using the comprehensive shareholder rights measure constructed by Gompers et al. (), we find that firms with stronger shareholder rights are associated with fewer income‐increasing discretionary accruals, suggesting that stronger shareholder rights deter managers from reporting aggressive earnings. Moreover, if insider ownership introduces managerial entrenchment, managers with higher ownership would be insulated from shareholder discipline. Consistent with this entrenchment theory, we find that the association between shareholder rights and earnings management becomes insignificant in the presence of higher levels of insider ownership. Shareholder rights are negatively associated with earnings management only when insider ownership is low. Our results indicate that the disciplinary effect of shareholder rights can be attenuated by high levels of insider ownership.

Keywords: Shareholder rights, Insider ownership, Earnings management, Management entrenchment

Suggested Citation

Huang, Henry and Wang, Weimin and Zhou, Jian, Shareholder Rights, Insider Ownership and Earnings Management (March 2013). Abacus, Vol. 49, Issue 1, pp. 46-73, 2013. Available at SSRN: https://ssrn.com/abstract=2230750 or http://dx.doi.org/10.1111/j.1467-6281.2012.00390.x

Henry Huang (Contact Author)

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States
8322763834 (Phone)

Weimin Wang

Saint Louis University ( email )

63103

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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