Board of Directors’ Interest in Share Ownership and Earnings Management

Abstract

In this study, we examine the effect of directors’ ownership on earnings management practices. Explicitly, we draw from the agency theory to distinguish between ownership by non-executive directors and ownership by executive directors to investigate reasons for directors and managerial opportunistic behaviour. Utilising data from a sample of 864-firm-year observations ranging from 2009 to 2017 period, we test our hypothesis through OLS regression. We find that non-executive directors’ interests in shareholding are significantly associated with higher levels of earnings management. We observed a decrease in abnormal accruals on the overall basis of the combined ownership of both executive and non-executive directors. Overall, ownership by all directors combined significantly reduces managerial opportunism. By contrast, there is no evidence that executive directors’ ownership mitigates managerial opportunism. This paper contributes to corporate governance literature, particularly when the independence of board members is essential. This study disaggregates board ownership into executive holdings and non-executive holdings, dimensions which were hitherto rendered as managerial ownership or board ownership. These findings imply firms’ corporate governance policy and regulations.