The Effect of Monitoring by Outside Blockholders on Earnings Management
Department or Administrative Unit
This study examines two competing views concerning the effect of outside blockholders on earnings management. First, outside blockholders, with higher motivation and ability to monitor managers’ actions than small shareholders, might reduce earnings management through their closer monitoring. Second, outside blockholders require a higher return from their investment and pose a bigger threat of intervention to the firm’s management. They may increase managers’ incentives to conduct income-increasing earnings management. This study tests the two competing views by examining the association between outside blockholder ownership and earnings management for NYSE firms. Our results indicate that outside blockholder ownership is positively associated with discretionary accruals for firms that face declining premanaged earnings. Thus, the evidence, consistent with the second view, suggests that outside blockholders are not effective monitors of income-increasing earnings management that is generally within the bounds of GAAP.
Zhong, K., Gribbin, D., & Zheng, X. (2007). The effect of monitoring by outside blockholders on earnings management. Quarterly Journal of Business & Economics, 46(1), 37-60. DOI: 10.2307/40473429
Quarterly Journal of Business & Economics
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