Ownership characteristics and earnings quality : the moderating effect of institutional settings

Student thesis: Doctoral Thesis

Abstract

Ongoing debate within the corporate governance literature is in conclusive on the impact of ownership characteristics on earnings quality. The ambiguity of findings has been widely attributed to differences in institutional settings and across different national regimes. This thesis is concerned, therefore, with how institutional settings in a number of different countries modify the link between ownership characteristics and earnings quality. It focuses on the importance of the country-level institutional context and the extent of interplay between governance mechanisms, both within firms and between countries. Extant studies of this nature are scant and unsatisfactory, providing a research gap that this thesis aims to fill. Such evidence is helpful to regulators in designing governance regulations which help to improve the quality of financial information. By specifying and applying a contingency model, using moderating regressions, this research aims to advance, through empirical research, our understanding of how governance mechanisms within firms and countries impact on earnings quality. It advances the literature by using both accruals and real earnings management as proxies for earnings quality, showing how the differences between them enhance, or limit, governance mechanisms. Baseline regression models are estimated at the firm level, and are used to test the direct effect of ownership characteristics on accruals and real earnings management. The work provides a quantitative analysis of panel data from 2013-2017 utilising the most recent data available at the inception of the research upon which this thesis depends.It examines secondary-source data, newly compiled from a combination of the OSIRIS and Datastream databases, from Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand, Taiwan, the United Kingdom, and the United States, thus enabling novel analysis, within and across countries, of the impact of ownership on earnings quality. Using these data, the baseline model reveals that the incentivised behaviour of owners towards accruals and real earnings management depends upon their self-interest. This confirms predictions of agency theory, implying that alternative techniques of earnings management are likely to be used strategically, depending on the ownership characteristics of firms. Further, the results show that the same set of governance mechanisms may not limit all techniques of earnings management. Importantly, the moderating effects of country-level institutional attributes alter the earnings management incentives of owners. The results confirm institutional theory, that country-level contextual factors influence the behaviour of individuals. Further, they shed new light on the interplay effect between ownership characteristics and country level institutional settings. This research develops the governance literature, in showing how governance mechanisms within firms and countries work as an int ertwined system in reality. Such findings should be of benefit to regulators in governance design.
Date of Award22 Jun 2020
Original languageEnglish
Awarding Institution
  • University Of Strathclyde
SupervisorJulia Smith (Supervisor) & Krishna Paudyal (Supervisor)

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