Passive Ownership and Earnings Manipulation

42 Pages Posted: 15 Jan 2018 Last revised: 29 Jan 2020

See all articles by Ahmed Baig

Ahmed Baig

Texas Tech University - Area of Finance

Jared DeLisle

Utah State University

Gulnara R. Zaynutdinova

West Virginia University, Department of Finance

Date Written: March 1, 2019

Abstract

We examine the relation between passive ownership and financial reporting quality measured by Beneish’s (1999) earnings’ manipulation score (M-score). We find that passive ownership is negatively related to M-score and to the likelihood of being designated as a “manipulator” firm. However, these relations are muted when one of the four largest auditing firms audits the firm in the previous year. The evidence is consistent with the notion that passive owners act as monitors, but relinquish their monitoring role to the Big 4 auditing firms. We also find that higher passive ownership relative to total fund ownership yields higher risk-adjusted returns among firms with high M-scores. Passive ownership may offer greater monitoring benefit to the firms with high M-Scores than firms with low M-Scores.

Keywords: passive ownership, earnings manipulation, M-score, fraud, financial reporting, corporate governance

JEL Classification: G11, G20, G23, G30, G34, G39, M4, M41, M42

Suggested Citation

Baig, Ahmed and DeLisle, Jared and Zaynutdinova, Gulnara R., Passive Ownership and Earnings Manipulation (March 1, 2019). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018. Available at SSRN: https://ssrn.com/abstract=3101874 or http://dx.doi.org/10.2139/ssrn.3101874

Ahmed Baig

Texas Tech University - Area of Finance ( email )

Lubbock, TX 79409
United States

Jared DeLisle (Contact Author)

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

Gulnara R. Zaynutdinova

West Virginia University, Department of Finance ( email )

Morgantown, WV 26506
United States

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