Managerial ownership‐induced income smoothing and information asymmetry

Ahsan Habib and Haiyan Jiang

Pacific Accounting Review, 2012, vol. 24, issue 2, 211-232

Abstract: Purpose - The purpose of this paper is to examine whether managerial ownership‐induced income smoothing accentuates or attenuates an information asymmetry problem. Standard agency theory suggests that managerial ownership may play a significant role in alleviating agency problems between managers and external shareholders that can arise from information asymmetry. According to this view, managerial ownership‐induced income smoothing could convey managerial private information and could, therefore, be considered as informative. However, managerial ownership could also entrench managers with absolute control of firms, and encourage them to engage in earnings manipulation, including earnings smoothing, in order to hide private benefits of control. Design/methodology/approach - The paper uses two smoothing measures, and separate total smoothing into its innate and discretionary components. The former is determined by firm fundamentals, whereas discretionary smoothing allows managers the flexibility to use it for either informative or opportunistic reasons. The paper then regresses information asymmetry, as proxied by scaled bid‐ask‐spreads, on the interaction between managerial ownership and both these smoothing components. Findings - The paper documents that managerial ownership‐induced discretionary smoothing has a positive effect on bid‐ask spreads. This result seems to support the entrenchment view of managerial ownership. Practical implications - This study offers insights to policy makers interested in enhancing the effectiveness of the managerial ownership aspect of corporate governance in New Zealand. Originality/value - This paper uses agency theory to provide a comparative assessment of the efficient versus the entrenchment hypotheses with respect to managerial ownership.

Keywords: Managerial ownership; Management accountability; Innate smoothing; Discretionary smoothing; Information asymmetry; Corporate governance; New Zealand (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

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:eme:parpps:01140581211259839

DOI: 10.1108/01140581211259839

Access Statistics for this article

Pacific Accounting Review is currently edited by Professor Tom Scott, Dr Pei-Chi Kelly Hsiao, Associate Professor Chelsea Liu, Associate Professor Sophia Su, Associate Professor Thu Phuong Truong and Dr Lily Chen

More articles in Pacific Accounting Review from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().