Managerial Ownership Structure and Earnings Management Available to Purchase

This study examines the relation between managerial ownership structure and earnings management. Unlike previous research which treats insiders as a homogeneous group, we further classify insiders into executives, outside directors, and blockholders to conduct an in‐depth study. Earnings management is captured by discretionary accruals that are estimated using the modified Jones model. For a large sample of Taiwanese listed firms over the period 1997 and 2004, we find that discretionary accruals first increase and then decrease with executive ownership, forming an inverted U‐shaped relationship. However, discretionary accruals are positively affected by director ownership and blockholder ownership. The results suggest that equity stake owned by top officers of a firm should be encouraged in order to reduce agency cost, thus enhancing information content of earnings.