Employee stock ownership and earnings management: evidence from France

Riadh Garfatta

International Journal of Management Practice, 2023, vol. 16, issue 2, 249-265

Abstract: Although the relationship between employee stock ownership (ESO) and earnings management has a theoretical basis, it has hardly been the subject of empirical validation. This study attempts to investigate the nature of the relationship between ESO and earnings management practices. It is carried out on the sample of 136 French CAC All-Tradable index companies observed from 2015 to 2019. The system generalised method of moments (GMM) estimator is used in the dynamic panel and the results estimated from the system GMM model show no significant correlation at ESO levels below 3%, the threshold at which the relationship becomes positive. We also note that earnings management is upwards. A priori, ESO at significant levels appears interesting for the manager and encourages him to be in coalition with employee owners to develop his opportunistic behaviour and therefore the earnings management practices. This entrenchment hypothesis is consistent with the conclusion of Gharbi and Lepers (2008) stating that significant employee ownership favours CEO entrenchment. These findings are with strong economic implications. It is very important for investors to know that companies with significant ESOs tend to manage their earnings upwards.

Keywords: employee stock ownership; ESO; earnings management; corporate governance; system GMM model; France. (search for similar items in EconPapers)
Date: 2023
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