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Ownership structure and earnings management in emerging markets—An institutionalized agency perspective

Shuji Rosey Bao and Krista B. Lewellyn

International Business Review, 2017, vol. 26, issue 5, 828-838

Abstract: Previous earnings management research has largely focused on firm-level governance mechanisms in single countries or on macro-level variables in multiple countries. Building on this research, we incorporate firm ownership predictors along with national institutional dimensions to explore why firm decision makers in emerging markets vary in their earnings management behavior. Our theoretical framework integrates agency and institutional theories proposing that firm-level ownership mechanisms do not function in isolation, but are reinforced or attenuated by elements of the institutional governance environment. The multilevel empirical analysis of 1200 firms in 24 emerging markets indicates that controlling ownership is positively related to earnings management. We find that the level of minority shareholder protection in a country weakens this positive relationship. We also find that regulatory quality strengthens the negative relationship between institutional ownership and earnings management activity. It is hoped that awareness of how firm ownership structures interact with national-level institutions in affecting firm-level behavior will help managers and investors develop skills and practices to better cope with business norms in emerging economies.

Keywords: Corporate governance; Emerging markets; Earnings management; Agency theory; Institutional theory (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:iburev:v:26:y:2017:i:5:p:828-838