Ownership structure and earnings management in emerging markets — An institutionalized agency perspective
Shuji Rosey Bao
a, Krista B. Lewellyn
b,*
aElonUniversity,LoveSchoolofBusiness,314E.HaggardAvenue,Elon,NC27244,UnitedStates
bUniversityofWyoming,CollegeofBusiness,1000E.UniversityAve.,Laramie,WY82071,UnitedStates
ARTICLE INFO Articlehistory:
Received8December2015 Receivedinrevisedform3June2016 Accepted8February2017
Availableonline24February2017 Keywords:
Corporategovernance Emergingmarkets Earningsmanagement Agencytheory Institutionaltheory
ABSTRACT
Previousearningsmanagementresearchhaslargelyfocusedonfirm-levelgovernancemechanismsin single countries or on macro-level variables in multiple countries. Building on this research, we incorporatefirmownershippredictorsalongwithnationalinstitutionaldimensionstoexplorewhyfirm decisionmakersin emergingmarketsvaryintheirearningsmanagementbehavior.Ourtheoretical frameworkintegratesagencyandinstitutionaltheoriesproposingthatfirm-levelownershipmecha- nismsdonotfunctioninisolation,butarereinforcedorattenuatedbyelementsoftheinstitutional governance environment. Themultilevelempiricalanalysisof 1200firmsin 24emerging markets indicatesthatcontrollingownershipispositivelyrelatedtoearningsmanagement.Wefindthatthelevel ofminorityshareholderprotectioninacountryweakensthispositiverelationship.Wealsofindthat regulatoryqualitystrengthensthenegativerelationshipbetweeninstitutionalownershipandearnings management activity. Itis hoped that awareness of howfirm ownershipstructures interact with national-levelinstitutionsinaffectingfirm-levelbehaviorwillhelpmanagersandinvestorsdevelop skillsandpracticestobettercopewithbusinessnormsinemergingeconomies.
©2017ElsevierLtd.Allrightsreserved.
1.Introduction
“Westruggletofindcompaniesthatsatisfyourqualitycriteria,” saidChristopherWong,senior investmentmanageratAberdeen AssetManagementinSingapore,whorunsitsemergingmarkets fund.“Weareuncomfortablewiththeopaquebusinessstructures andthegenerallypoorcorporategovernancestandards.”(Sami- nather,2015)
In recent years, emerging markets have received much scholarlyattentiondue totheireconomic growth, restructured markets, and significant involvement in the world economy (Hoskisson, Eden,Lau, &Wright,2000).Despite thesedevelop- ments,astheopeningquoteillustrates,thequalityandaccuracyof financialinformation reportedbymanyfirmsinthesecountries continues to be questioned in practice as well as in scholarly research(e.g.,Li,Park,&Bao,2014;Wang&Yung,2011).Relatedly, earnings management is a concern for regulatory bodies in emerging markets as well, since it may threaten foreign
investmentsandcorporatepartnershipsinthesemarkets(Chen, Elder,&Hsieh,2007).
Earningsmanagementisdefinedas“thepracticeofdistorting thetruefinancialperformance ofthecompany”(Klein,2002,p.
376).Itoccurswhenmanagersexercisediscretioninthewaysthey structuretransactionsinfinancialreports,withtheintenttoeither misleadstakeholdersaboutthetruefinancialperformanceofthe company or to influence transactions that rely on reported accounting values (Healy & Wahlen, 1999). Firms in emerging marketshavebeenfoundtomanageearningstoamuchgreater degreethanthose indeveloped economies(Li,Selover,&Stein, 2011; Li et al., 2014). However, despite extensive empirical research on the antecedents of earnings management in the developed market economies of theU.S. and U.K (e.g.,Bedard, Chtourou,&Courteau,2004;Erickson&Wang,1999;Klein,2002;
Park&Shin,2004;Peasnell,Pope,&Young,2005;Xie,Davidson,&
DaDalt, 2003; Teoh, Welch,& Wong,1998), there is much less understanding and empirical evidence of how and why firms manageearningsinemergingeconomies(Wang&Yung,2011).
Variationinearningsmanagementacrossfirmsindeveloped marketsis oftenviewed as afunction of firm-levelgovernance quality(e.g.Davidson,Jiraporn,Kim,&Nemec,2004;Klein,2002;
Peasnelletal.,2005).Thisresearchlargelyunderpinnedbyagency
*Correspondingauthor.
E-mailaddresses:[email protected](S.R.Bao),[email protected](K.B.Lewellyn) .
http://dx.doi.org/10.1016/j.ibusrev.2017.02.002 0969-5931/©2017ElsevierLtd.Allrightsreserved.
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International Business Review
j o u r n a l h o m ep a g e: w w w . e l s e v i e r . c o m / l o c at e / i b u s r e v
theorysuggeststhatbecauseoftheseparationbetweenmanagers andshareholders, theseactorsmayhaveconflicting goals (Ball, 2013).Thedivergenceingoalsmaymanifestasaninclinationfor managerstousetheirdiscretion tomakeearnings appear near targetlevels,soastoachieveprivatecontrolbenefitsand other self-interested objectives (Jiraporn, Miller, Yoon, & Kim, 2008).
Since much of this agencytheory-based earnings management researchhasbeenconductedinsinglecountrysettingsorwithin developedmarkets,lessattentionhasbeengiventohowearnings management activityvariesin countriesthathave dramatically different firm-ownership structures and national institutional environments.
Weproposethatin emergingmarkets,wherefirm-leveland country-levelfactorsdrivingmanagerialbehaviorlargelydepart fromtheAnglo-Americangovernancesystem,traditionalagency theory(Jensen&Meckling,1976)willnotsufficientlyexplainthe variationinearningsmanagement.Rather,institutionalizedagency theory(Aguilera& Jackson, 2003;Seal, 2006)provides a more appropriate framework to explore theinterplay between firm- levelgovernancemechanismsandnationalinstitutionalelements onearningsmanagement.
Theintegrationofagencyandinstitutionaltheoriesrecognizes thattheuniqueinstitutionalenvironmentsinwhichmanagersand owners/shareholdersare embeddedshapes thenature of these economic actorsaswellashow theyevaluate information, use theirdiscretion, and justify theirbehavior (Aguilera &Jackson, 2003;Filatotchev,Jackson,&Nakajima,2013;Hoenen&Kostova, 2014;Ning,Kuo,Strange&Wang,2014).Inparticular,itpermits considerationofthedistinctivepatternsofshareholder concen- trationthatareoftenobservedacrossemergingmarketcountries as well as the unique identities of ownership types in these countries(Chen&Yu,2012;Filatotchevetal.,2013).
We hypothesize that in emerging economies, controlling shareholderswillbebetterabletoinfluencethereportingpolicies of accounting information, in order to fulfill self-interested purposes,resulting ingreaterearnings management activity.In contrast, we expect institutional ownership will be negatively relatedtoearningsmanagement asthesetypesofshareholders haveincentivesandcapabilitiestopromoteaccuratereportingof earningsand discouragefinancial misreporting(Chung,Firth, &
Kim,2005; Chung&Zhang,2011).Yetweknow fromprevious theoryandempiricalevidencethattheeffectivenessofcorporate governancemechanismsisinfluencedbytheirleveloflegitimacy with respect to prevailing institutions within a given society (Aguilera,Filatotchev,Gospel&Jackson,2008;Filatotchevetal., 2013).Thereforeweexpectthatincentivesforagivenshareholder to influence earnings management activity will vary with the institutional forces at play in the context withinwhich a firm operates.Specifically,we explorehowownership concentration andthetypeofownermayaffectearningsmanagementactivity differently because of variation in institutional characteristics relatedtominorityshareholderprotectionsandregulatoryquality acrosscountries.
Consequently,byexaminingtheserelationshipsina nuanced fashion,weseektocontributetheoreticalandempiricalinsightsto thecomparativecorporategovernanceliterature,andinparticular thatfocusedonemerging markets.Althoughinterestininvesti- gatingfirmbehaviorsinemergingeconomies hasgrownsignifi- cantly in the past decades, research exploring corporate governanceissues ofthesemarketsremainlimited (Chen, Li,&
Shapiro,2011;Crittenden&Crittenden,2012).Thefewcompara- tiveinternationalstudiesonearningsmanagement(e.g.Han,Kang, Salter,&Yoo,2010;Shen&Chih,2005)considertheinfluenceof firm-levelandcountry-levelgovernancemechanismsinisolation, notcapturingtheembeddednatureof thesituation.Ourmulti- level analysis with a sample of 1200 firms from 24 emerging
economies providesaricherunderstandingofhowthenational institutionalenvironmentinwhichfirmsareembeddedinplaysa criticalrole inshapingtherelationshipsbetweentheimportant firm-level governancemechanismsof ownership bycontrolling andinstitutionalshareholderswithearningsmanagementactivity.
In doing so we further understanding of why managers are incentivized and/or dissuaded from using their discretion to manageearningsduetoconstraintsfromboththeirfirm’sinternal and externalcontexts.Assuchweareabletoexplicitlyaddress concerns about the “under-contextualized nature of corporate governance research” (Filatotchev et al., 2013, p. 966) and in particular “facilitate an international contextualization for the traditional, context-free agency theory perspective” (Bowe, Filatotchev,&Marshall,2010,p.347).
2.Theoryandhypothesesdevelopment
For firms operating in emerging markets, there is less of a distinctseparationbetweenownershipandmanagementthanfor firmsoperatinginthedevelopedmarketsoftheU.S.andU.K.(Chen
&Yu,2012; Filatotchevetal., 2013).Evenfirmsfromemerging marketsthatarepubliclylistedgenerallyhavea highlyconcen- tratedownershipstructurewithtopmanagersbeing(ordirectly representing) controlling shareholders (Ding, Zhang, & Zhang, 2007).Thisunderscorestheneedtore-considerthe traditional theoreticalapproachestoearningsmanagementresearch,which hasfocusedonconflictsbetweenprinciples(owners)andagents (managers)(García-Meca&Sánchez-Ballesta,2009).
Withaninstitutionalizedagencytheoryperspective,managers arestillviewedasagentswithauthoritydelegatedfromthelegal ownersofthecorporations,buttheiractionsarealsoinfluencedby valuesand normsthatareconsideredlegitimatewithina given institutional environment (Seal, 2006). Institutionalized agency theory connects the routine nature of managerial accounting practices with external institutional influences(Seal, 2006).As such,itisamoreappropriateframeworkforunderstandinghow firmownershipgovernancemechanismsshapeearningsmanage- ment activity in emerging markets. Additionally, it provides a meaningful waytounderstandhow theserelationshipsmaybe influencedbyelementsoftheinstitutionalcontext.
2.1.Firm-levelgovernancemechanismofcontrollingownership Inemergingmarketsthefundamentalagencyproblemforfirms isnotconflictsofinterestbetweenoutsideinvestorsandmanagers, butratherconflictsofinterestbetweencontrollingshareholders and minorityshareholders(Chenetal.,2007;Dingetal.,2007;
Johnson, La Porta, Lopez-de-Silanes,& Shleifer, 2000). In other words, inemergingmarkets,thetraditionalagencyproblemsof prerequisiteconsumptionandentrenchmentarelessrelevantthan the agency problems of expropriation (Dharwadkar, George, &
Brandes,2000;Filatotchevetal.,2013).Thismayinpartexplain why internal governance mechanisms used to monitor firm managers in developed capital markets, such as independent boardsofdirectorsandseparatedCEOandchairpositions,have been less effective at forestalling opportunistic managerial behavior such as earnings management in emerging markets (García-Meca&Sánchez-Ballesta,2009).It isalsowhy,scholars havearguedthatboardsofdirectorsinemergingeconomiesare not as actively engaged in monitoring corporate executives compared totheircounterpartsin developedmarkets, rather,it is the firm owners who largely fulfill the governance role of monitoring(Denis&McConnell,2003).
Research has shown that high levels of ownership by managementinsidersinfirmsoperatingindevelopedeconomies mayresultinentrenchment(Lim&McCann,2013;Morck,Scheifer,
&Vishny 1988).Entrenched managershave greater powerand discretionwherebytheyareabletopursueactionsfortheirown personal benefit, which may include misreporting earnings information to a greater extent (Cornett, Marcus, & Tehranian, 2008; O’Connor, Priem, Coombs, & Gilley, 2006). In emerging markets, the entrenchment of controlling shareholders who representa powerful individual or family is similar to that of theinsidermanagerinthedevelopedmarkets.
Indeed, ithasbeenproposedthatconcentratedownershipis theultimatedeterminantofcompanies'poorgovernancepractices inemergingmarkets(e.g.,Claessens,Djankov,&Lang,2000;Fan&
Wong,2002;Stulz,1988).Thereasonfor decreasedgovernance qualityisthatasownershipexceedsacertainpoint, itbecomes increasinglyeasy for the majority owners to gain control over managersinordertogenerateprivatebenefitsattheexpenseof minority shareholders (La Porta, Lopez-de-Silanes, Shleifer, &
Vishny,2000;Shleifer&Vishny,1997;Tang,Liu,&Cheng,2009).
Controlling owners gain private control benefits by appointing affiliatedmembersasmanagersordirectorsinthecompaniesthat theyown(Yoshikawa,Zhu,&Wang,2014).Asrepresentativesof controllingshareholders,these managersand directorsare less likelytobequestioned orchallengedbyotherdirectorsonkey issues.For instance, Jaggiand Leung (2007) argue that outside directorsarereluctanttoopposedirectorsormanagersaffiliated withthecontrollingshareholdersbecausetheirownreappoint- mentisatthediscretionofthecontrollingshareholders.
Earnings management becomes a likely consequence of ownership concentration,because a controllingowner through theirsignificantinfluenceovermanagementislikelytohavethe abilitytobeinvolvedwiththeproductionofthefirm’saccounting information.Controllingshareholdersmayhaveeconomicincen- tivestomasktruefirmperformance.Forexample,intheeventthat expropriation results in lower actual earnings, they will have incentives to manage earnings upward, toavoid revealing any informationabouttheirmisbehavior(Dingetal.,2007).Basedon theabovearguments,weproposethefollowing:
Hypothesis 1. In emerging markets, the level of controlling ownership is positively related to earnings management activity.
2.2.Firm-levelgovernancemechanismofinstitutionalownership Agencytheorypredictsthatinstitutionalinvestorsmayfulfill thegovernancefunctionsofmonitoring, disciplining,and influ- encing corporate managers (Ingley & Van Der Walt, 2004).
Empirical findings on the relationship between institutional shareholders and earnings management are mixed. Some find no relation between institutional ownership and earnings management(e.g.Sarkar,Sarkar,&Sen,2008; Siregar&Utama, 2008), althoughothersfindthat institutionalinvestorsmitigate earningsmanagementbehaviorbyservingaseffectivemonitorsof suchactivity(e.g.Jiraporn&Gleason2007;Rajgopal,Venkatacha- lam,&Jiambalvo,2002).Inameta-analysisoftenstudies,García- MecaandSánchez-Ballesta(2009)findtherelationshipbetween institutional ownership and earnings management to be non- significant.Weproposemixedempiricalfindingsmayinpartbe attributable to the differences in institutional contexts. In particular, we suggest that in emerging economies, there are unique conditions incentivizing institutional owners to seek accurateearningsinformation.
Informationasymmetrybetweenfirminsidersandinvestorsis generallyhighinemerging markets,since archivaldatamaybe non-existent and/or inaccurate due to the lack of disclosure requirements (Hoskisson et al., 2000). Yet, compared to other investors, institutional investors often have more extensive
resources to gather more reliable information about earnings expectations(Bhattacharya,2001;Jiambalvo,Rajgopal,&Venka- tachalam,2002).Relatedly,Chung etal. (2005) and Chungand Zhang (2011) suggest that institutional shareholders are more sophisticated investors, and therefore will be better able to accurately analyze firm performance and consequently detect financialmisreporting.Thisnotonlyprovidesgreaterfirm-specific knowledge,butalsoenhancesthesetypesofowners’capabilities tomonitormanagers’discretionarymanagementofearnings.
Also, in the contextof emerging market firms, institutional shareholdersmayreducetheinfluenceofcontrollingshareholders onthefirm,andthereforeconstraintheabilityoftheentrenched insiders affiliated with controlling owners to expropriate firm funds through earnings management (Sarkar et al., 2008).
Specifically,largeinstitutionalshareholders willbeincentivized tomonitorfirmmanagementinordertoprotecttheirinvestments, sincemarketexitcouldposesignificanteconomicandreputational risks (Brav,Jiang, Partnoy,&Thomas, 2008; Ciccotello&Grant, 1999;Hadani,Goranova,&Khan,2011;Johnson&Greening,1999).
Also,institutionalshareholdersoftenhavelargeequitypositions withthepotentialforsizablereturnsontheirinvestment,which justifiesthecostsassociatedwithmonitoring controllingshare- holdersand/ortheiraffiliatedmanagers(Gillan&Starks,2007).
There are several ways institutional owners can monitor managerialbehaviorin emergingmarkets. Forinstance,institu- tional‘activism’cantaketheformof‘proxycontests’tobringabout changestofirms’governancestructures(Smith,1996).Also,the institutionswhichtheinvestorsrepresentcanplacerequirements onfirmspriortoinvesting,similartothewaythatabanklending moneytoafirmusuallyrequiresanauditbeforeagreeingtothe loan (Ingley & Van Der Walt, 2004). Based on the presented arguments,weproposethatmanagerialincentivesformanipulat- ing earnings will be mitigated by institutional owners. More formallystated:
Hypothesis2. In emergingmarkets, thelevelofinstitutional ownership is negatively related to earnings management activity.
2.3.Effectsoftheinstitutionalcontext
Researchershavelongnotedthatdifferencesintheinstitutional environmentsofcountriesdrivevariationincorporatefinanceand accountingbehaviors(e.g.Han et al.,2010; LaPorta,Lopez-de- Silanes, & Shleifer 1999; Leuz, Nanda, & Wysocki, 2003).
Institutionsthroughtheirenablingand constrainingforcesmay yielddifferenteffectsonthevarioustypesofownersaswellasfirm managersdependingontheextenttowhichtheseeconomicactors conformtolegitimizednormsandexpectationsexistingintheir environments (Desender, Aguilera, Crespi, & García-Cestona, 2013). Therefore different formal institutions legitimize and empowerdifferenttypesofowners’interests. Forthesereasons wearguethatearningsmanagementactivitiesoffirmsinemerging markets are not exclusively driven or restricted by firm-level mechanismsofcontrollingownershipandinstitutionalownership, but will likely be moderated by two particular institutional governance mechanisms: minority shareholder protections and theregulatoryqualitywithinagivennationaleconomy.
2.3.1.Minorityshareholderprotectionandcontrollingownership Minority shareholder protectionsinclude disclosurerequire- ments designed to reduce information asymmetries between issuing firmsand potentialinvestors,approvalof certaintrans- actionsex-anteandex-post,votingprotocols,abilitytochallenge controllingshareholdersaswellaspublicenforcementmeasures suchasprisontermsandfinesformisconduct(Djankov,LaPorta,
Lopez-de-Silanes,&Shleifer,2008).Suchprotectionsreducethe possibilityof controllinginsiders expropriatingprofits orassets fromthefirm(LaPortaetal.,2000;Shleifer&Vishny,1997).
Research suggests that strong disclosure requirements and enforcementsoutlinedbyminorityshareholderprotection(Djan- kovetal.,2008)canprotecttheseinvestorsbygivingthemthe meanstodisciplineinsiders(e.g.,toreplacemanagers),aswellas byenforcingcontractsdesignedtolimitinsiders’privatecontrol benefits (e.g., Claessens, Djankov,Fan, & Lang, 2002; La Porta, Lopez-de-Silanes,Shleifer,&Vishny1998;Leuzetal.,2003).Such controlmechanismscaneffectivelymitigatecontrollingowners’ ability to hide firms’ true financial performance from other investors. As minority shareholders can only take disciplinary actions against controlling shareholders when they detect the privatecontrolbenefits,controllingshareholdersthereforehavean incentivetomanipulateaccountingearningssoastoconcealtheir diversionactivities(Shleifer&Vishny,1997Zingales,1994).This argumentsuggeststhatearningsmanagementisalikelyoutcome ofcontrollingshareholder expropriationin thecontextof weak minority shareholder protection. Relatedly, Morck, Strangeland, andYeung (2000)arguedthatin a countrywithweakinvestor protection,itismucheasierforinsiderstopredatecompanyprofits withoutfearofpenalties.
Empiricalevidenceindicatesthatminorityshareholderprotec- tionplaysan importantrole in influencinginternationaldiffer- ences in corporate earnings management (Leuz et al., 2003).
Specifically,asthedisclosurerequirementsinprivateenforcement increase, there is greater transparency in the firms’ financial reporting (Djankov et al., 2008), reducing the motivation and abilitytomanipulateearnings.Also,duetothefinesandprison termsthatmayoccurwithgreaterpublicenforcement(Djankov etal.,2008),managementwillfeelgreaterpressuretoassurethe authenticityoffinancialreporting.Therefore,wepropose:
Hypothesis 3. In emerging markets,greater minority share- holderprotectionweakens thepositive relationshipbetween thelevelofcontrollingownershipandearningsmanagement activity.
2.3.2.Regulatoryqualityandinstitutionalownership
Lawsprotectingthefinancialmarketsandintegrityofcontracts alongwiththequalityoftheirenforcementareimportantformal institutions essential for effective corporate governance
(Filatotchev et al., 2013; LaPorta, Lopez-de-Silanes, Shleifer, &
Vishny, 1997; La Porta et al.,1998, 2000). We argue that high regulatoryqualityintheexternalenvironmentcomplements,or reinforces the role of institutional shareholders in ensuring accuratereportingofearningsinthreekeyways.
First,highregulatoryqualitycanincreaseinstitutionalshare- holders’ power in challenging management decisions that are intended tobenefitcontrollingshareholderstotheexclusionof other stakeholders (La Porta et al., 2000). In a high quality regulatoryenvironment,itwillbeeasierforinstitutionalinvestors toexert pressuretochangetheboardmembers iftheyare not fulfillingtheirobligationstoeffectivelymonitormanagers’actions anddecisions(LaPortaetal.,2000).
Second,a strongregulatoryenvironment candecreaseinfor- mation asymmetry, and in turn reduce the monitoring costs incurredbyinstitutional shareholders.Li,Moshirian,Pham, and Zein(2006)arguethatthewillingnessofinstitutionalshareholders to become or remain shareholders can vary with external conditions that affect the potential monitoring costs. In other words, afavorablemonitoringenvironmentresultingfromhigh regulatory qualitycan enable institutional investors to capture more monitoring gains and encourage them tomaintain their stakes. This will lead to increased monitoring efficiency and effectiveness.
Third,researchsuggeststhatsometimesinstitutionalinvestors whohavecloseaccesstomanagementcanbelabeledas‘insiders’, and in such cases strong regulatory quality may mitigate the collusion between these institutional shareholders and their managementcounterparts(Koh,2003).Insum,wearguethata high quality regulatory environment can insure institutional investors’rolestoguardagainstopportunisticearningsmanage- ment by conferring on them power to discipline managers, incentivizing them through lower monitoring costs, as well as byenforcingcontractsdesignedtolimitmanagers’privatecontrol benefits.Therefore,wepropose:
Hypothesis4.Inemergingmarkets,regulatoryqualitystrength- ensthenegativerelationshipbetweeninstitutionalownership andearningsmanagementactivity.
Fig.1summarizesthehypothesizedrelationshipsbetweenthe ownership governance mechanisms, institutional elements and earningsmanagementactivityinemergingeconomies.
Fig.1.ConceptualMulti-levelModelofDriversofEarningsManagementActivityinEmergingEconomies.
3.Methods 3.1.Sample
Webaseoursampleonthetop50firms(bytotalassets)operating ineachofthe24emergingmarketsthatarelistedbyInternational Monetary Foundation (IMF) in 2012. These firms have all the necessaryfinancialstatementdatarequiredtomeasuretotaland performance-adjusted discretionary accruals and is a sampling processusedinpreviousresearch(e.g.Semadeni,2006;Stock,2004;
van Klaveren,Tijdens,& Gregory, 2013). The 24 countriesrepresented inoursamplearethefollowing:Argentina,Brazil,Bulgaria,Chile, China,Estonia, Hungary,India, Indonesia, Latvia,Lithuania, Malaysia, Mexico,Pakistan,Peru,Philippines,Poland,Romania,Russia,South Africa,Thailand,Turkey,Ukraine&Venezuela.Thusthefinalsample consistsof1200firmsfrom24countries.Followingpriorresearch (e.g.Bradbury,Mak,&Tan,2006;Dingetal.,2007)weusealagged design,suchthatthedependentvariableofearningsmanagement activityoccursin2013andtheindependentandcontrolvariablesin 2012.Thistimeperiodfollowstheyearsoftheglobalfinancialcrisis andasnotedbytheglobalconsultingfirm,A.T.Kearney,GDPgrowth inemergingmarketsaveraged5.3percentperyearintheperiod between2008and2013(Laudicina,Peterson,&Lohmeyer,2014).
Thefirmsinthesampleoperateinagriculture,mining,construction, manufacturing, transportation, communication, wholesale and retailtrade.Thenumberofindustriesrepresentedineachcountry ranges from three to seven. Following previous research (e.g.
Desenderetal.,2013;Hanetal.,2010;Leuzetal.,2003),financial industryfirmsareexcludedbecausetheiraccountingandreporting processesaresignificantlydifferentfromotherindustries.
3.2.Dependentvariable
Earningsmanagementhasbeenmeasurednumerouswaysin theliteraturelargelybecausetherearemanywaysformanagersto manipulate earnings (Man & Wong, 2013). Manipulation of operating accruals is likely to be a favored instrument for opportunistic earnings management in emerging economies because they have no direct cash flow consequences and are relatively difficult todetect (Han et al., 2010). Furthermore,as accrualsareavisiblecomponentoffinancialstatements,thereisa directrelationship betweenaccrualsand governancecharacter- isticsoffirms(Bradbury,Mak,&Tan,2006).Therefore,consistent withearlierstudies(e.g.Becker,DeFond,Jiambalvo,&Subrama- nyam,1998;Jones,1991;Klein,2002)weusethemagnitudeof discretionary accruals as the proxy for earnings management.
Specifically,weapplythesamemethodusedbyHanetal.(2010) andidentifythediscretionaryportionofaccrualsforagivenfirm byestimating thefollowingmodel usingordinaryleast squares (OLS)for all firms in our sampleat time t,and controllingfor performance.
TACCt/TAt1=a0*(1/TAt1)+a1*(Change in Revenuet/TAt1)+a2* (GPPEt/TAt1)+a3*(ROAt/TAt1)+et
WhereTACCtisthetotalaccrualsinyeart,ChangeinRevenuetisthe changeofrevenueinyeart,andGPPEtisthelevelofgrossproperty, plant,and equipment in year t. Each variable in the model is deflatedbythelaggedbookvalueoftotalassets(TAt-1)toavoid heteroscedasticityintheerrorterm(Hanetal., 2010;Tucker&
Zarowin,2006).Returnonassets(ROA)isaddedasanadditional controlvariable,becausepreviousresearchfinds that theJones modelismis-specifiedforwell-performingorpoorlyperforming firms(Kothari,Leone,&Wasley,2005;Tucker&Zarowin,2006).
Theresiduals et from the regressionsare used as a proxy for discretionaryearningsmanagement.Sinceourhypothesesfocus
onthemagnitudeofaccrualsratherthanonthedirectioninwhich theaccrualismanaged,weusetheabsolutevalueofdiscretionary accrualsfollowingpriorresearch(Hanetal.,2010).
3.3.Independentandmoderatingvariables
Weusetheownershippercentageofthelargestshareholderas theproxy forcontrolling ownershipmeasured as thenumberof sharesheldbythelargestshareholderasapercentageofthetotal number of shares outstanding (Ding et al., 2007). The data is obtained from the Bloomberg Terminal Database (Bloomberg, 2013).
We represent institutional ownership as the percentage of a firm’s outstanding shares owned by institutional owners (i.e.
banks, insurancecompanies, and mutual funds) as opposed to individualowners.Again,thedataisobtainedfromtheBloomberg Terminal Database (Bloomberg, 2013) and is measured as the numberofsharesheldbyinstitutionalshareholderasapercentage ofthetotalnumberofsharesoutstanding.
Forminorityshareholderprotectionswithinacountryweusea measurefromDjankovetal.(2008).Thismeasurehasbeenusedin recentstudies(e.g.,Boulton,Smart,&Zutter,2010;Engelen&van Essen, 2010; Lewellyn &Bao,2014)and captures theextentto which self-dealingbycontrollingshareholders isdiminished or held toan acceptablelevel by meansof regulatingcontracting processes(e.g.requireddisclosure,independentreview,abilityto litigate,accesstoevidence)aswellastheimpositionoffinesand prisonsentencesforself-dealing.
Tocaptureacountry’sregulatoryqualityweusethevaluefrom theWorldBank’sDevelopmentIndicatorDatabase(WDI).Accord- ingtoWDI,regulatoryqualityreferstothedegreethatthelegal and regulatory framework of a country encourages fairness, objectiveness, and encourages competitiveness of enterprises.
Thismeasureisfrequentlyusedincross-nationalscholarlywork investigatingcountrylevelinstitutions’effectsoneconomicsand firmbehavior,andisconceptuallyconsistentwithregardstoour theoreticalframework.
3.4.Controlvariables
Weincludeseveralfirm-levelcontrolvariablesthathavebeen studied in previous earnings management research. First we includetwofirm-levelvariablesthataretypicallyusedinagency theory-basedcorporategovernanceresearch:proportionofoutside directorsandCEOduality.Priorstudieshaveshownboardswith more independent directors are associated with increased monitoringofmanagerswhichleadstolessearningsmanagement activity(Hashim&Devi,2008;Klein,2002;Liu &Lu,2007;Xie etal.,2003).Duetodifferencesacrosscountriesinwhatconstitutes
‘independence’wecategorizeanynon-employeeboardmemberas anoutsidedirector,asthisisoneattributeofindependencethatis commonacrossjurisdictions(Zattoni&Judge,2012).Thevariable is measured as the proportion of outside directors to total directors.CEOdualityisalsoarguedtoaffectthemonitoringroles oftheboard,andthuscouldinfluenceearningsmanagement(Xie etal.,2003;Davidson,Jiraporn,Kim,&Nemec,2004).Firms,where theCEOisalsotheboardchairarecoded1and0otherwise.
Wealsoincludeboardsizeasacontrolvariableasrelationships between this variable and earnings management have been equivocalwithsomeshowingpositiveeffects ofsizeandothers showingnegativerelationships(e.g.Bradburyetal.,2006).Since previousresearchhasshownthatfirmsthatareinclinedtotake greater financial risks oftenhave greater incentives to manage earningsopportunistically(Hanetal.,2010),wealsocontrolfora firm’sdebt–to-equityratio.Wealsoincludedfirmsizeasacontrol, measuredas thenaturallogof total sales.Finally, we included
industry (two-digitSIC codes) dummiesin orderto controlfor industry specific effects. The data for the control variables is obtainedfromtheBloombergterminaldatabase.
3.5.Modeling&analysis
Sinceourstudyinvolvesassessingtheimpactofbothfirmand country-levelfactorsonfirm-levelearningmanagement,weuse hierarchicallinearmodeling(HLM)(Bryk&Raudenbush,2002).At level1,theunitofanalysisisthefirm,andatlevel2,theunitof analysisisthecountry.Giventhatweareinterestedintheeffectsof twofirm-levelfactorsandtwocountry-levelfactorsonearnings management, weuse thegroup-meancentering option for our firm-level variables and grand-mean centering option for our country-levelvariables (Hofmann& Gavin,1998). Furthermore, sinceHypotheses3and4arefortheinteractioneffectsoflevel2 variablesonlevel1predictors,weuse‘slopeasoutcome’models with random effects to account for both within country and betweencountryvarianceinourmodelfollowingpriorresearch (e.g.Hofmann,1997).
4.Results
Table1showsthecorrelationmatrixanddescriptivestatistics forthevariablesinthisstudy.Themeanforthedependentvariable ofearnings management(discretionaryaccruals) is0.15,witha standarddeviationof0.12,whichiscomparabletoothermultiple- countrystudies(e.g.Hanetal.,2010;Xieetal.,2003).Descriptive statisticsontheothervariablesinthemodelarealsoprovidedin Table 1. The percentage of controlling shareholding is 57% on average,whereastheaverageforinstitutionalshareholdingis12%.
The table also shows that minority shareholder protection averages0.34onascalebetween0and1forthe24countriesin oursample,whileregulatoryqualityaveragestoa0.25.Inaddition, onaverage,there areabout44% outside directorsoncorporate boardsforfirmsinoursampleand16%oftheCEOsalsoserveasthe chairmanoftheboard.Themaximumcorrelationis0.34between the proportion of outside directors and regulatory quality. To assure that multicollinearity was not problematic, variance inflation factors (VIF) were calculated. VIFs range from 1.11 to 1.50(average1.27),wellbelowthesuggestedvalueof4.0(O’Brien, 2007).
Table2showstheresultsofourhypothesestesting.Model1 includesonlycontrolvariables. In model2 weadded themain effects of controllingownership and institutional ownershipas wellasthemoderatingvariables.Addingthesevariablesincreases theoverallmodelfitcomparedtothecontrolvariablemodelas indicatedbythestatisticalsignificanceofthechangeintheWald chi-squarevalue(p<0.01).Inthesubsequentmodels(3and4)we addedtheinteractioneffectsandagainthechangeintheWaldchi- square between the direct effects model 2 and each of the
interaction models is significant (p<0.01 for the controlling ownership andminority shareholder protectioninteraction and p<0.05 for the institutional ownership and regulatory quality interaction).
Hypothesis1predictsapositiverelationshipbetweencontrol- ling ownership and earnings management. As shown, the coefficientfor controllingownershipis positiveandstatistically significant(b=0.04,p<0.01),supportinghypothesis1.Hypothesis 2predictsanegativerelationshipbetweeninstitutionalownership andearningsmanagement.Theregressioncoefficientforinstitu- tionalownershipisnotsignificant,andthereforehypothesis2is not supported. While we did not formally hypothesize direct effectsofminorityshareholderprotectionandregulatoryquality, includingthesevariablesinmodel2showstheexpectednegative relationship with earnings management, consistent with our conceptualframeworkandpriorresearch.
Model 3 tests hypothesis 3, which predicts that minority shareholder protections will weaken the positive relationship betweencontrolling ownershipand earnings management. The resultsprovidesupportforthishypothesis,asthecoefficientfor theinteractiontermbetweencontrollingownershipandminority shareholder protections is significant and negative (b=0.08, p<0.001).
Hypothesis4suggestingregulatoryqualitywillstrengthenthe negativerelationshipbetweeninstitutionalownershipandearn- ingsmanagement isalso supported.In model 4theinteraction termcoefficientbetweeninstitutionalownershipandregulatory quality is statistically significant in the negative direction (b=0.03,p<0.001).
Toillustratetheinteractioneffectswegraphtheinfluenceof controlling ownership and institutional ownership on earnings managementwithminorityshareholderprotectionandregulatory qualityatlowandhighlevelsinFigs.2and3respectively.InFig.2 the slope of controlling ownership on earnings management activityissteeperwhenminorityshareholderprotectionsarelow compared towhen theyare high;indicatingthat theimpactof controlling ownership is greater when protection for minority shareholdersisweak.
Fig.3showstherelationshipbetweeninstitutionalownership and earningsmanagement activity whena country’sregulatory qualityishighandlow.Whentheinstitutionalcontexthashigh regulatory quality theslope of institutional ownershipis steep while it is almost flat when the regulatory quality is low, illustratingthattherelationshipbetweeninstitutionalownership and earnings management activity is more negative withhigh regulatoryquality
Therearethreecontrolvariableswhicharesignificantinallthe models. In linewithpreviousresearchthe debt-to-equityratio showsasignificantlypositiverelationshipwithearningsmanage- ment activity.Thegovernancecontrol variablesof proportionof outsidedirectorsandCEOdualityexhibitsignificantlypositiveand
Table1
DescriptiveStatisticsandCorrelationMatrix.
Mean Std.Dev. VIFs 1 2 3 4 5 6 7 8 9
1 Earningsmanagementactivity 0.15 0.12
2 Controllingownership 0.57 0.17 1.14 0.04
3 Institutionalownership 0.12 0.26 1.21 0.11 0.27
4 Minorityshareholderprotections 0.34 0.44 1.40 0.08 0.02 0.18
5 Regulatoryquality 0.25 0.57 1.50 0.12 0.12 0.01 0.33
6 Proportionofoutsidedirectors 0.44 0.17 1.27 0.02 0.15 0.04 0.05 0.34
7 CEOduality 0.16 0.37 1.11 0.04 0.06 0.01 0.02 0.10 0.08
8 Boardsize 11.93 4.25 1.38 0.02 0.02 0.06 0.28 0.05 0.04 0.19
9 Debt-to-equity 1.34 1.44 1.14 0.09 0.14 0.19 0.04 0.05 0.03 0.12 0.23
10 Firmsize 1.8 6.83 1.29 0.07 0.06 0.06 0.17 0.25 0.10 0.10 0.27 0.12
Allcorrelationsgreaterthan0.08aresignificantatp<0.05.
negativeeffectsrespectively.Atfirstglancetheseresultsmayseem counterintuitive to agency theory logic. However, previous researchin thecontextofemerging marketfirms,hasreported similarfindings (e.g., Bradbury, Mak, &Tan, 2006; Chen et al., 2007;Sarkar,Sarkar,&Sen,2008).Managersoffirmsthathave boardswithhighproportionsofoutsidedirectorsmayfeelthey havegreateropportunitiesandcapabilitiestoshieldtheirearnings management activity from observation since these directors typicallyhavelessfirm-specificknowledge(Hillman,Cannella,&
Paetzold,2000).Alsoasmentionedpreviously,theproportionof outsidedirectorsmeasuremaynotadequatelycapturewhethera directoristrulyindependentofbothmanagersand/orcontrolling shareholders,andthusweacknowledgetheresultsmayalsobe affectedbythisissue.
With respect to the effect of CEO duality on earnings management, several studies using single country samples in
China,India,Malaysia,andSingapore,findaswedo,asignificant negativerelationshipbetweenCEOdualityandearningsmanage- ment(e.g.,Bradburyetal.,2006;Hashim&Devi,2008;Liu&Lu, 2007; Sarkar,Sarkar, & Sen,2008).This may indicate that the additionalpoweraCEOhaswhenalsopossessingtheboardchair position,providesacounterbalancetopressurefromcontrolling ownerstoengageinearningsmanagementactivity.
Togetherthesefindingsfurtheremphasizethatagencyeffects mayfunctiondifferentlyintheuniqueinstitutionalcontextsthat characterizeemergingmarkets.
4.1.Robustnessanalyses
We perform several additional analyses to examine the robustness of our findings, which we report in Table 3. As an alternativemeasurefordiscretionaryaccruals,wealsousedtotal Table2
HLM(SlopeasOutcome)ResultsonEarningsManagementActivity.
Model1 Model2 Model3 Model4
ControlsOnly MainEffects Interaction Interaction
B S.E. Controlling&institutionalownership Minorityshareholderprotection Regulatoryquality
B S.E. B S.E. B S.E.
FirmLevel
Proportionofoutsidedirectors 0.02** 0.01 0.03** 0.01 0.02** 0.01 0.00** 0.01
CEOduality 0.02*** 0.00 0.01*** 0.00 0.02*** 0.00 0.04*** 0.00
Boardsize 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00
Debt-to-equity 0.02** 0.00 0.00** 0.00 0.10** 0.00 0.01** 0.00
Firmsize 0.16 0.08 0.15 0.03 0.09 0.03 0.07 0.04
Controllingownership 0.04** 0.02 0.04** 0.05 0.04** 0.03
Institutionalownership 0.00 0.01 0.01 0.01 0.01 0.02
Industrycontrols Yes Yes Yes Yes
CountryLevel
Minorityshareholderprotection(MSP) 0.03*** 0.01 0.02*** 0.01 0.03*** 0.01
Regulatoryquality(RQ) 0.01** 0.01 0.01** 0.01 0.01** 0.01
Cross-LevelInteraction
Controllingownership*MSP 0.08*** 0.04
Institutionalownership*RQ 0.03*** 0.01
Waldx2 21.54**
ChangeinWaldx2 15.56** 7.22** 5.26*
yp<0.10;*p<0.05;**p<0.01;***p<0.001.
Fig.2. InteractionEffectsofControllingOwnershipandMinorityShareholderProtectiononEarningsManagement.
accrualsastheproxy forearnings managementfollowing prior research(e.g.,Jaggi&Leung,2007;Liu&Lu,2007;Massa,Zhang,&
Zhang,2015).Using this alternativedependentvariabledidnot significantlyalterourreportedfindings;theregressioncoefficients for our hypothesized direct and moderating effects remain significantandinthepredicteddirections.
Althoughmuchoftheextantresearchhasusedtheownership of thelargestshareholder as a proxyof controllingownership, somestudieshaveusedtheownershippercentageofthetopfive shareholders (García-Meca & Sánchez-Ballesta, 2009). Thus we performedarobustnesscheckusingthisalternativemeasure.The resultsareverysimilartoourreportedfindings,astheregression coefficientsforcontrollingownershipisstillpositiveandsignifi- cantinallmodels,asaretheinteractionterms.
Asa final check weused TheHeritage Foundation’sProperty RightsIndexasanalternatecountry-levelmeasurefortheminority
shareholders’ protection and regulatory quality variables. The PropertyRightsIndex“measuresthedegree to whichacountry’slaws protect private property rights and the degree to which its governmentenforces those laws.It alsoassesses thelikelihood that private property will be expropriated and analyzes the independenceofthejudiciary,theexistenceofcorruptionwithin thejudiciary,andtheabilityofindividualsandbusinessestoenforce contracts.”(http://www.heritage.org/index/rule-of-law).Sincethe definitionofthismeasurecoincides withaspectsofbothofour country-levelmeasures(e.g.,minorityshareholderprotectionand regulatoryquality)weuseitinplaceofeachofthesemeasures,but alsonotethatitismuchbroaderthanthemeasuresweuseinthe main analysis. Also, thismeasure, asopposed tootherpossible proxies,suchasthequalityofthenationallegalenvironment(Choi
&Wong,2007)ortherevisedanti-directorrightsindex(Spamann, 2010)wasavailableforallofthecountriesinoursample.Theresults Fig.3.InteractionEffectsofInstitutionalOwnershipandRegulatoryQualityonEarningsManagement.
Table3
RobustnessAnalyses.
RobustnessAnalyses OriginalModel Totalaccrualsasthe dependentvariable
Controllingownershipmeasuredas thepercentageheldbytopfive owners
HeritageFoundation’s(HF)PropertyRights Indexasanalternatecountry-level measure
B S.E. B S.E. B S.E. B S.E.
FirmLevel
Proportionofoutsidedirectors 0.00** 0.01 0.01** 0.01 0.00** 0.01 0.01** 0.00
CEOduality 0.04*** 0.00 0.03* 0.00 0.05** 0.00 0.01** 0.01
Boardsize 0.00 0.00 0.02 0.00 0.00 0.00 0.00 0.00
Debt-to-equity 0.01** 0.00 0.00** 0.00 0.01** 0.00 0.00** 0.00
Firmsize 0.07 0.04 0.09 0.04 0.06 0.02 0.07 0.03
Controllingownership 0.04** 0.03 0.08*** 0.01 0.02** 0.01 0.05** 0.04
Institutionalownership 0.01 0.02 0.00 0.01 0.01 0.02 0.01 0.02
Industrycontrols Yes Yes Yes Yes
CountryLevel
Minorityshareholderprotection(MSP) 0.03*** 0.01 0.02*** 0.01 0.03*** 0.01
Regulatoryquality(RQ) 0.01** 0.01 0.01** 0.01 0.01** 0.01
HFpropertyrightsindex 0.00** 0.00
Cross-LevelInteraction
Controllingownershipinteraction 0.08*** 0.04 0.11*** 0.02 0.09** 0.05 0.01** 0.00
Institutionalownershipinteraction 0.03*** 0.01 0.02** 0.01 0.03*** 0.01 0.00*** 0.00
yp<0.10;*p<0.05;**p<0.01;***p<0.001.
withthisalternatemeasurewerelargelyunchangedfromthosewe report.Taken altogether, these results provide support for the empiricalrobustnessofourresults.
5.Discussion
In this study we addresstheresearchquestionof how firm ownershipmechanisms directlyand in interactionwithformal national institutional governance mechanisms influence firms’ earningsmanagementpracticeinemergingmarkets.Ourtheoret- icalargumentsarebasedonaninstitutionalizedagencyperspec- tive and our findings contribute to comparative governance researchbyshowingthattherelationshipsbetweenfirmowner- shipandearningsmanagementactivityaresignificantlymoderat- edbyimportantnationalinstitutionalelements.Bydoingso,the studyunderscoresthesaliencyofintegratingagencytheoryand institutional theory to enhance understanding of governance phenomenainemergingmarkets.
Although a large body of existing corporate governance research on earnings management in developed markets has focusedon theinfluence of boardstructure and characteristics such as CEO duality and board independence (García-Meca &
Sánchez-Ballesta,2009),duetotheuniqueownershipstructures prevalentinemergingmarketsfirmswefocusontheroleofthis internalgovernancemechanism.Specifically,wetheorizeandfind support that controlling ownership serves as an important determinantofearningsmanagementinoursampleof1200firms in24emergingmarkets.
Incontrasttoresearchthathasfoundempiricalsupportforthe monitoring role of institutional shareholders (e.g. Jiraporn &
Gleason,2007;Rajgopal,Venkatachalam,&Jiambalvo,2002),our non-significant findings of a relationship between institutional ownershipandearningsmanagement activityechoesthemeta- analysisresultsofGarcía-MecaandSánchez-Ballesta(2009).We suggestthesemixed findings may bepartlydue toa failure to account for country-level regulatory environment, since this elementoftheinstitutionalenvironmentisanimportantmeans bywhichinstitutionalinvestorsareabletoexerttheirmonitoring poweronfirmstheyareinvestedin. Indeed,ourfindingofthe significant interaction between institutional ownership and regulatoryqualityindicatesthathighexternalregulatoryenforce- ment is not merely complementary, but necessary to the role institutionalinvestorscanplayinensuringaccuracyandintegrity of firms’ reporting of earnings. This finding, along with the significant finding on the interaction between minority share- holderprotectionandcontrollingownershiponearningsmanage- mentvalidates and extendstheinstitutionalized agencytheory perspective. In particular, it highlights that elements of the institutionalenvironmentreinforcefirm-levelgovernancemech- anisms’ effects on firm behavior by providing the necessary infrastructuretoincreasemonitoringeffectivenessandefficiency.
Our research contributes additional insights to comparative corporategovernanceliterature,inparticularthatassociatedwith emergingmarketfirms.Ourfindingofa significantrelationship betweencontrollingshareholderandearningsmanagementadds toandreinforcesthegrowingresearch(e.g.,Chen&Yu,2012;Gaur
&Delios,2015;Song,Wang,&Cavusgil,2015)demonstratingthat ownership is an important agency predictor in shaping firm behaviorinanemergingmarketsettingwhenconsideredaspartof amultilevelmodel.
Relatedly,existingresearchhaslargelyattributedvariationin earnings management to either the influence of firm-level corporategovernanceindicators ornational differencessuchas cultureandinvestorprotections(Ball,Kothari,&Robin,2000;Fan
& Wong, 2002; Leuz et al., 2003; Man & Wong, 2013). Our multilevel study that combines both and accounts for the
embedded nature of firms in an emerging economy context answers calls from scholars to consider the effects of these important governance mechanisms together (e.g. Aguilera &
Jackson, 2003; Aguilera et al., 2008). Overall these findings underscorethat similarfirm-levelgovernancemechanismsmay havedissimilaroutcomesindifferentinstitutionalcontexts.
5.1.Practicalimplications
Our findings also have implications for policy makers, managers, and investors. Policy makers in emerging markets wishing topromoteforeigninvestments intheircountriesmay find it beneficial to work towards strengthening minority shareholder protections, as well as regulatory quality, as our findings suggest they may play important roles in mitigating earningsmanagementactivity.Thisinturnincreasesthelikelihood thattheirdomestic firms willbeviewedascredibleinvestment vehicles.For foreignmanagerslookingtopartnerwithfirmsin emergingmarketsaswellasforeigninvestorslookingtoinvestin emergingmarkets,ourresearchmaybehelpfultotheirrespective decision making processes. For instance, understanding the internalcorporategovernanceofafirm,specificallytheownership structuremayimproveinvestors’abilitytoeffectivelyevaluatethe acceptabilityofinvestmentinthefirm.Moreover,awarenessofthe interactionoffirm-specificandnationalcorporategovernancein affectingfirmbehaviorwillhelp managersand investorstonot onlyselect thebest countriesfor foreigninvestments, but also develop managerial skills and practices to better cope with business norms and routines in firms operating in emerging countries.
5.2.Limitationsandfutureresearch
Ourfindingsaresubjecttoseverallimitations,butwhichmay provideavenues forfutureresearch. First,we predictedinstitu- tionalownershipwouldmitigatefirms’earningsmanagementand failedtofindsupporttothisproposition.Whilewefoundsupport forourinteractionhypothesis,futureresearchcouldbenefitfrom separatinginstitutionalownershipintodomesticinstitutionsand foreigninstitutions.Aspriorresearch(Hu&Cui,2014)hasshown that foreign institutional investors sometimes play a more influentialroleingoverningfirmsthandomestictypesinemerging markets,webelieve examiningthese twotypes ofinstitutional owners’influenceonearningsmanagementindividually,instead of cumulatively, may provide additional contributions to the earnings management literature. In similar fashion, who the controllingowneris(e.g.,family,state,orbank)andhowtheyhave control (voting versus cash flow rights) may also influence earnings management activity, in particular they are likely to have differentmotivations for suchbehavior. We see this as a particularlyinterestingavenueforfutureresearch.
Second, we examined the role of two national governance mechanisms(regulatoryqualityandminorityshareholderprotec- tion)onfirm-level earningsmanagement. Although weviewed thesedimensionsashavingparticulartheoreticalrelevancewith regards to firm-level ownership governance mechanisms and conductedrobustnesscheckswithanothermeasure,weacknowl- edgethatothercountrylevelgovernancepredictorsmayalsoplay aroleinmitigatingearningsmanagement.Forinstancestudying theeffectsofinstitutionsassociatedwithgovernmentefficiency, controlofcorruptionand nationalcultureinconcertwithother firm-levelmechanismsmayalsoprovidevaluableinsights.
Third, our measurement of earnings management activity, while based on previous research, relied on the measure of accruals.Werecognizethatconsideringotherrepresentationsof earningsmanagementsuchasdirectassetmisappropriationand
