The Effect of Shareholder Rights and Insider Ownership on Earnings Management

2013. Abacus: A Journal of Accounting, Finance and Business Studies 31 (1): 28-50.

40 Pages Posted: 6 Sep 2006 Last revised: 1 Mar 2017

Henry He Huang

Yeshiva University - Sy Syms School of Business

Weimin Wang

Saint Louis University

Jian Zhou

University of Hawaii at Manoa

Date Written: October 1, 2010

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, Ishii, and Metrick (2003), we find that firms with stronger shareholder rights are associated with less income-increasing discretionary accruals, suggesting that stronger shareholder rights deter managers from reporting aggressive earnings. More importantly, we investigate whether this association is conditional on the level of insider ownership. 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: earnings management, shareholder rights, insider ownership

Suggested Citation

Huang, Henry He and Wang, Weimin and Zhou, Jian, The Effect of Shareholder Rights and Insider Ownership on Earnings Management (October 1, 2010). 2013. Abacus: A Journal of Accounting, Finance and Business Studies 31 (1): 28-50.. Available at SSRN: https://ssrn.com/abstract=928611

Henry Huang

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States
8322763834 (Phone)

Weimin Wang (Contact Author)

Saint Louis University ( email )

63103

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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