Ownership Structure and Earnings Management in View of Effective Monitoring and Myopic Institutions Hypothesis: A Dynamic Panel Estimation

Abstract

The current research envisages the ownership structure and earnings management nexus in the context of the effective monitoring hypothesis and myopic institutions hypothesis. The ownership aspects, including, shareholdings by the management, institutions, foreign institutions, pension funds, investment companies, and mutual funds are analyzed. The study follows Kothari et al. (2005) for the estimation of discretionary accruals and applied Arellano and Bond dynamic panel estimation to test the models based on a sample of 206 non-financial firms over the period of 2015–2019. The results of the study supported the agency theory, effective monitoring hypothesis, and myopic institutions hypothesis. Consistent with the previous empirical studies, the results reveal that managerial and institutional ownership curtails earnings management practices and discourages myopic management. Furthermore, the analysis of institutional investors based on their investment objectives reveals that the ownership of pension funds and investment companies restrains earnings management practices. On the other hand, discretionary accruals increase monotonically due to the existence of ownership by mutual funds. Furthermore, the study also provides a beer insight to regulatory authorities in order to design policies in such a way that ensures the protection of minority shareholders.