An Analysis of Ownership Structure and Corporate Governance Indicators on Discretionary Accruals

Abstract

The debate on the impact of ownership structure and corporate governance on earnings management remains uncertain. This study explored the impact of ownership structure and corporate governance on earnings management with the use of the ordinary least square estimation method in the context of Pakistan. This study utilized the famous modified John’s model (1995) for estimating discretional accruals which are used as a proxy for earning management. Our results indicated that institutional investors play a significant role in constraining earnings management practices. The number of members on the board of directors, and ownership concentration influence discretionary accruals. Among the control variables, we found that more profitable firms, are growing, or have higher leverage actively manage their earnings, while earnings management decreases with the age of the firm. Results from this study revealed around the relationship between ownership structure and corporate governance code on earnings management was diverse. Larger investment by institutions decreases ownership concentration, removes block holding and consequently, it would decrease earning management. The result revealed that board independence has a positive impact on earning management. These results suggested that the board did not act as a monitoring tool to reduce the manipulation of the accounting information.