Ownership structure and earnings management: evidence from Jordan

• Published date: 03 May 2016
• Pages: 135-161
• DOI: https://doi.org/10.1108/IJAIM-06-2015-0031
• Date: 03 May 2016
• Author: Ebraheem Saleem Salem Alzoubi
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Ownership structure and

earnings management: evidence

from Jordan

Ebraheem Saleem Salem Alzoubi

School of Accountancy, College of Business,

Universiti Utara Malaysia, Sintok, Malaysia

Abstract

Purpose – The purpose of this paper is to examine the association between internal corporate

governance mechanism and earnings management of Jordanian companies. More specically, the

author examines several hypotheses regarding the relationships between ownership and earnings

management.

Design/methodology/approach – This study measures the magnitude of discretionary accruals as

a proxy for earnings management using the cross-sectional modied Jones model. A number of

econometric techniques are used including ordinary least squares and generalized least squares to test

the relationship between company ownership and earnings management, using a sample of 62

companies listed on the Amman Stock Exchange.

Findings – The results revealed that insider managerial ownership, institutional ownership, external

blockholder, family ownership and foreign ownership have superior inuence on nancial reporting

quality, as it is, to a greater extent, potentially able to curtail earnings management. The ndings

contended that the aspects of ownership structure have a signicant inuence on earnings

management, which is in agreement with the theories of corporate governance and opinions that have

been highlighted through a number of international bodies.

Research limitations/implications – Due to lack of data, the paper depends on cross-sectional data

applied to isolate abnormal accruals.

Practical implications – The evidence may be conceivably benecial as a supporting fundamental

for regulatory action, particularly those that affect the ownership structure. The ndings have

signicant implications for regulators as well as supervisors, who will benet by the comprehension of

how ownership structure affects earnings management and enhance nancial reporting quality.

Originality/value – The current research produced its essential contribution through empirically

displaying that ownership structure has different implications on earnings management. Moreover, the

results recommended that both policymakers and researchers would no longer contemplate ownership

structure as a whole, given that ownership structure has different implications on earnings

management, measured by the discretionary accruals.

Keywords Ownership structure, Corporate governance, Financial reporting quality,

Earnings management

Paper type Research paper

The author gratefully acknowledges the helpful comments and suggestions received from the two

anonymous reviewers. Editor-in-Chief Maggie Liu provided excellent editorial support. All the

remaining errors are the sole responsibility of the author.

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

Ownership

structure and

earnings

management

135

Received 1 June 2015

Revised 6 August 2015

Accepted 18 August 2015

InternationalJournal of

Accountingand Information

Management

Vol.24 No. 2, 2016

pp.135-161

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-06-2015-0031

1. Introduction

In recent times, earnings management has been given substantial attention by

regulators and corporate stakeholders. Consistent with Healy and Wahlen (1999, p. 368):

[…] earnings management occurs when managers use judgment in nancial reporting in

structuring transactions to alter nancial reports to either mislead some stakeholders about

the underlying economic performance of the company or to inuence contractual outcomes

that depend on reported accounting numbers.

Meanwhile, Ronen and Yaari (2008, p. 27) dened earnings management as “a collection

of managerial decisions that result in not reporting the true short-term,

value-maximising earnings as known to management”. The nature of accounting

accruals provides the management discretion in deciding the real earnings a company

records in any specied time. Asymmetric information permits the management to

manage earnings to maximise their personal benets or to be indicative of their own

information, therefore affecting Financial Reporting Quality (FRQ) (Chung et al., 2004;

Gul et al., 2003;Liu and O’Farrell, 2011). As accounting gures, inclusive earnings are

utilised to decrease agency costs in the executive compensation setting, and motives for

earnings management can be debt covenants, bonus plans, meeting analyst’s

anticipations or elevated supplementary funds in convenient terms.

The concern and attention in corporate governance has developed exponentially

particularly with the pioneering company scandals, e.g. BCCI, Enron, Maxwell and

WorldCom, in the UK and USA. The necessity for powerful corporate governance had

been highlighted through numerous amendments and standards advanced at both the

international level and the country level, for example, the Combined Code in the UK,

Jordanian Corporate Governance Code (JCGC), the Organisation for Economic

Development (OECD) Code and the Sarbanes–Oxley Act in the USA.

Usually, researchers of corporate governance concentrated on developed countries

(Park and Shin, 2004;Peasnell et al., 2005;Wang, 2006). However, limited study has

occurred on the level to which the developed economies’ corporate governance matters

are relevant to that of emerging economies. A crucial motivation for examining the

emerging economies’ corporate governance, such as Jordan, is the important

development of emerging economies by companies being listed on the international

stock exchange. The growth has been in line with the drive from inside emerging

economies to invite further foreign direct investment through encouraging long-term

economic growth. Intrinsically, the concentration on foreign investment growth in

Jordan has required the support of transparent procedures in the company operations.

Furthermore, there is a need for effectual corporate governance assistance to achieve

high FRQ levels (Dimitropoulos and Asteriou, 2010;Gul et al., 2009;González and

García-Meca, 2014). La Porta et al. (2000) contended that emerging economies have

conventionally been reduced in nancial markets due to their weakened corporate

governance. As a result, an examination of the ownership structure aspects as a

signicant driver in governance can produce insights to corporate governance

development in an emerging economy, such as that of Jordan.

Jordan is a good study subject to examine for the effectiveness of ownership

structure, as it has displayed immediate concerns in enhancing the pillars of corporate

governance to improve FRQ. Moreover, unlike some of the other developed countries,

Jordan is characterised by high ownership concentration. This claries why ownership

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