Ultimate Ownership, Income Management, and Legal and Extra‐Legal Institutions

In‐mu Haw, Bingbing Hu, Lee‐seok Hwang and Woody Wu

Journal of Accounting Research, 2004, vol. 42, issue 2, 423-462

Abstract: This study provides evidence of the role of both legal and extra‐legal institutions in limiting the income management induced by the detachment of control rights from the cash flow rights of ultimate owners. The tests use a unique, comprehensive data set for firm‐level control and ownership structures from 9 East Asian and 13 Western European countries. Univariate regressions show that income management that is induced by the wedge between control rights and cash flow rights is significantly limited in countries with high statutory protection of minority rights (proxied by legal tradition, minority rights protection, the efficiency of the judicial system, or disclosure standards) and effective extra‐legal institutions (proxied by the effectiveness of competition laws, diffusion of the press, and tax compliance). Furthermore, multiple regression results show that a common law tradition and an efficient judicial system subsume the effects of the other legal institutions, and that a high rate of tax compliance subsumes the effects of the other extra‐legal institutions in curbing insider income management. It is surprising that a high rate of tax compliance ultimately has a greater effect than legal tradition and the efficiency of the judicial system. Although this finding is unexpected, given prior evidence on the dominant roles of legal institutions in macroeconomic issues and corporate policies, it is consistent with the recent argument that effective tax enforcement is like a public good in that it can reduce insiders' private control benefits. An implication of this finding is that closer attention to extra‐legal institutions has the potential to enhance our understanding of the institutional reforms needed to limit insider private control benefits.

Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (136)

Downloads: (external link)
https://doi.org/10.1111/j.1475-679X.2004.00144.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:42:y:2004:i:2:p:423-462

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0021-8456

Access Statistics for this article

Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

More articles in Journal of Accounting Research from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().