Ownership structure and financial reporting quality: Moderating role of regulation

Abstract

This study examines how ownership structure (OS) affects the financial reporting quality (FRQ) of listed firms in India. It also investigates whether the interaction of firm-level governance (business group) and country-level governance (Companies Act, 2013) yields optimal outcomes. This study examines FRQ measured using accruals and real earnings management (AEM and REM). Higher earnings management lowers FRQ and vice-versa. Firms affiliated with business groups are likelier to choose real over accruals earnings management. They trade off accruals and real earnings management to expropriate minority shareholders. This pattern reverses after a change in regulation. Thus, stringent regulations may lower FRQ (suboptimal outcomes). High-promoter holding firms have lower accruals quality, while high-institutional holding firms use discretionary expenses to manage earnings.