Private Control Benefits and Earnings Management

Question 1

Findings

Answer 1

Insider controlled firms are associated with more earnings management than noninsider controlled firms in low anti-self-dealing countries (i.e., in countries amenable to self-dealing) and in code law countries.
- Insider control is associated with 156% higher earnings management in countries that rank low on the anti-self-dealing rank.

Question 2

What about common law countries? PBOC

Answer 2

In countries where benefits consumption is lower, insiders may provide more informative disclosures to alleviate information asymmetry arising from complex ownership structures.

-> the lower earnings management of insider controlled firms

Question 3

Effect of divergence between the insider’s cash-flow rights and control rights?

Answer 3

Insider controlled firms in poor investor protection regimes with greater divergence are associated with more earnings management. In contrast,wedonotfind evidence of divergence influencing earnings management of insider controlled firms in strong investor protection countries.

Question 4

Effect of investment opportunities at the industry level?

Answer 4

Insider controlled firms in high self-dealing and code law countries that operate in industries with greater investment opportunities are associated with lower earnings management. These results reinforce the important trade-off between private benefits consumption and access to external capital in influencing disclosure practices.