IDEAS home Printed from https://ideas.repec.org/a/sae/iimkoz/v14y2025i1p75-87.html

Insider Ownership and Real Earnings Management in Indian Companies

Author

Listed:
  • Srikanth Potharla
  • Rachappa Shette

Abstract

The present study aims to examine, and to test the monitoring effect of institutional investment on, the relationship between insider ownership and real earnings management in Indian companies. The study examines the non-linear association between insider ownership and real earnings management using a sample of listed non-financial companies in the Indian market from 2011 to 2018. The study used pooled data OLS regression and Quantile regression. The findings reveal significant non-linear U-shaped relationship between insider ownership and real earnings management and that the large-size institutional investment makes such non-linear relationship insignificant. Contribution of the present study to the literature is two-fold. First, it proves the differential impact of the size of insider ownership on real earnings management. It indicates that firms having large-size insider ownership have greater scope for real earnings management, underscoring the need for the more scrutiny of reported earnings by the outsider shareholders. Second, it proves significant positive effect of the size of institutional investment in constraining the entrenchment by the insider owners. It signals that firms with large-size institutional investment have better quality of financial reporting and also contribute to efficient price discovery in the capital markets.

Suggested Citation

  • Srikanth Potharla & Rachappa Shette, 2025. "Insider Ownership and Real Earnings Management in Indian Companies," IIM Kozhikode Society & Management Review, , vol. 14(1), pages 75-87, January.
    • Handle: RePEc:sae:iimkoz:v:14:y:2025:i:1:p:75-87
    DOI: 10.1177/22779752221125262
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/22779752221125262
    Download Restriction: no
    File URL: https://libkey.io/10.1177/22779752221125262?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Petroni, Kathy Ruby, 1992. "Optimistic reporting in the property- casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 485-508, December.
    2. Chi‐Yih Yang & Hung‐Neng Lai & Boon Leing Tan, 2008. "Managerial Ownership Structure and Earnings Management," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 6(1), pages 35-53, January.
    3. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
    4. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    5. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    6. Rã‰Al Labelle, 1990. "Bond covenants and changes in accounting policy: Canadian evidence," Contemporary Accounting Research, John Wiley & Sons, vol. 6(2), pages 677-698, March.
    7. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    8. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    9. Radhakrishnan Gopalan & Sudarshan Jayaraman, 2012. "Private Control Benefits and Earnings Management: Evidence from Insider Controlled Firms," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(1), pages 117-157, March.
    10. Kim, Incheol & Miller, Steve & Wan, Hong & Wang, Bin, 2016. "Drivers behind the monitoring effectiveness of global institutional investors: Evidence from earnings management," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 24-46.
    11. Jensen, Michael C. & Meckling, William H., 2008. "Theory of the firm: managerial behavior, agency costs and ownership structure," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    12. Ball, R & Foster, G, 1982. "Corporate Financial-Reporting - A Methodological Review Of Empirical-Research - Reply," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 20, pages 245-248.
    13. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    14. Qian Sun & Wilson H. S. Tong & Jing Tong, 2002. "How Does Government Ownership Affect Firm Performance? Evidence from China's Privatization Experience," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1&2), pages 1-27.
    15. Saibal Ghosh, 2011. "Firm ownership type, earnings management and auditor relationships: evidence from India," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 26(4), pages 350-369, April.
    16. Morck, Randall & Schleifer, Andrei & Vishny, Robert W., 2008. "Management ownership and market valuation: an empirical analysis," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    17. Malmquist, David H., 1990. "Efficient contracting and the choice of accounting method in the oil and gas industry," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 173-205, January.
    18. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    19. Daley, Lane A. & Vigeland, Robert L., 1983. "The effects of debt covenants and political costs on the choice of accounting methods : The case of accounting for R&D costs," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 195-211, April.
    20. Balsam, Steven & Haw, In-Mu & Lilien, Steven B., 1995. "Mandated accounting changes and managerial discretion," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 3-29, July.
    21. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
    22. Ball, R & Foster, G, 1982. "Corporate Financial-Reporting - A Methodological Review Of Empirical-Research," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 20, pages 161-234.
    23. Chen, Xia & Harford, Jarrad & Li, Kai, 2007. "Monitoring: Which institutions matter?," Journal of Financial Economics, Elsevier, vol. 86(2), pages 279-305, November.
    24. Yuan Ding & Hua Zhang & Junxi Zhang, 2007. "Private vs State Ownership and Earnings Management: evidence from Chinese listed companies," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(2), pages 223-238, March.
    25. Saibal Ghosh, 2011. "Firm ownership type, earnings management and auditor relationships: evidence from India," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(4), pages 350-369, April.
    26. repec:bla:jfinan:v:58:y:2003:i:3:p:1301-1327 is not listed on IDEAS
    27. Katherine A. Gunny, 2010. "The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 855-888, September.
    28. Ranjitha Ajay & R. Madhumathi, 2015. "Institutional Ownership and Earnings Management in India," Indian Journal of Corporate Governance, , vol. 8(2), pages 119-136, December.
    29. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    30. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
    31. Bowen, Robert M. & Noreen, Eric W. & Lacey, John M., 1981. "Determinants of the corporate decision to capitalize interest," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 151-179, August.
    32. Armando Gomes, 2000. "Going Public without Governance: Managerial Reputation Effects," Journal of Finance, American Finance Association, vol. 55(2), pages 615-646, April.
    33. Dechun Wang, 2006. "Founding Family Ownership and Earnings Quality," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 44(3), pages 619-656, June.
    34. Denis, Diane K. & McConnell, John J., 2003. "International Corporate Governance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(1), pages 1-36, March.
    35. Henry He Huang & Weimin Wang & Jian Zhou, 2013. "Shareholder Rights, Insider Ownership and Earnings Management," Abacus, Accounting Foundation, University of Sydney, vol. 49(1), pages 46-73, March.
    36. Bae, Kee-Hong & Stulz, René M. & Tan, Hongping, 2008. "Do local analysts know more? A cross-country study of the performance of local analysts and foreign analysts," Journal of Financial Economics, Elsevier, vol. 88(3), pages 581-606, June.
    37. Jiang, Fuxiu & Ma, Yunbiao & Wang, Xue, 2020. "Multiple blockholders and earnings management," Journal of Corporate Finance, Elsevier, vol. 64(C).
    38. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-1177, December.
    39. Braam, Geert & Nandy, Monomita & Weitzel, Utz & Lodh, Suman, 2015. "Accrual-based and real earnings management and political connections," The International Journal of Accounting, Elsevier, vol. 50(2), pages 111-141.
    40. Ronald C. Anderson & David M. Reeb, 2003. "Founding‐Family Ownership and Firm Performance: Evidence from the S&P 500," Journal of Finance, American Finance Association, vol. 58(3), pages 1301-1328, June.
    41. DeFond, Mark L. & Park, Chul W., 1997. "Smoothing income in anticipation of future earnings," Journal of Accounting and Economics, Elsevier, vol. 23(2), pages 115-139, July.
    42. Chang Liu & Chune Young Chung & Hong Kee Sul & Kainan Wang, 2018. "Does hometown advantage matter? The case of institutional blockholder monitoring on earnings management in Korea," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(2), pages 196-221, February.
    43. Xu, Xiaonian & Wang, Yan, 1999. "Ownership structure and corporate governance in Chinese stock companies," China Economic Review, Elsevier, vol. 10(1), pages 75-98.
    44. Zmijewski, Mark E. & Hagerman, Robert L., 1981. "An income strategy approach to the positive theory of accounting standard setting/choice," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 129-149, August.
    45. Qian Sun & Wilson H. S. Tong & Jing Tong, 2002. "How Does Government Ownership Affect Firm Performance? Evidence from China’s Privatization Experience," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1‐2), pages 1-27.
    46. Keating, A. Scott & L. Zimmerman, Jerold, 1999. "Depreciation-policy changes: tax, earnings management, and investment opportunity incentives," Journal of Accounting and Economics, Elsevier, vol. 28(3), pages 359-389, December.
    47. Ayers, Benjamin C. & Ramalingegowda, Santhosh & Eric Yeung, P., 2011. "Hometown advantage: The effects of monitoring institution location on financial reporting discretion," Journal of Accounting and Economics, Elsevier, vol. 52(1), pages 41-61, June.
    48. repec:eme:maj000:02686901111124666 is not listed on IDEAS
    49. Ashbaugh-Skaife, Hollis & Collins, Daniel W. & Kinney Jr., William R., 2007. "The discovery and reporting of internal control deficiencies prior to SOX-mandated audits," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 166-192, September.
    50. Siregar, Sylvia Veronica & Utama, Sidharta, 2008. "Type of earnings management and the effect of ownership structure, firm size, and corporate-governance practices: Evidence from Indonesia," The International Journal of Accounting, Elsevier, vol. 43(1), pages 1-27, March.
    51. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    2. Hamadi, Malika & Heinen, Andréas, 2015. "Firm performance when ownership is very concentrated: Evidence from a semiparametric panel," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 172-194.
    3. Zeineb Barka & Taher Hamza, 2020. "The effect of large controlling shareholders on equity prices in France: monitoring or entrenchment?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(3), pages 769-798, September.
    4. Attig, Najah & Chen, Ruiyuan & El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck & Pittman, Jeffrey, 2020. "Are insiders equal? Evidence from earnings management in closely held East Asian firms," Research in International Business and Finance, Elsevier, vol. 54(C).
    5. Yves Mard & Sylvain Marsat, 2012. "Earnings management and ownership structure: Evidence from France [Gestion des résultats comptables et structure de l'actionnariat : le cas français]," Post-Print hal-02156592, HAL.
    6. Chen, Ching-Lung & Weng, Pei-Yu & Fan, Hung-Shu, 2023. "Exploring the role of excess control rights on real earnings management in family-controlled firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    7. Richardson, Grant & Wang, Bei & Zhang, Xinmin, 2016. "Ownership structure and corporate tax avoidance: Evidence from publicly listed private firms in China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(2), pages 141-158.
    8. Razzaque, Rushdi Md. Rezaur & Ali, Muhammad Jahangir & Mather, Paul R., 2016. "Real earnings management in family firms: Evidence from an emerging economy," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 237-250.
    9. Khosa,Amrinder & Ahmed,Kamran & Henry,Darren, 2019. "Ownership Structure, Related Party Transactions, and Firm Valuation," Cambridge Books, Cambridge University Press, number 9781108492195, Enero-Abr.
    10. Yves Mard & Sylvain Marsat, 2011. "Gestion des résultats comptables et structure de l'actionnariat : le cas français," Post-Print hal-00650550, HAL.
    11. Yen, Tze-Yu & Andre, Paul, 2007. "Ownership structure and operating performance of acquiring firms: The case of English-origin countries," Journal of Economics and Business, Elsevier, vol. 59(5), pages 380-405.
    12. Oh, Hyunjin & Chung, Chune Young & Fard, Amirhossein, 2023. "Tacit vigilance in an emerging economy: An institution-based perspective of passive blockholder monitoring," Research in International Business and Finance, Elsevier, vol. 64(C).
    13. Stavros E. Arvanitis & Theodoros V. Stamatopoulos & Dimitris Terzakis, 2018. "Is There a Non-linear Relationship of Market Value with Cash and Ownership?," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 68(1), pages 3-25, January-M.
    14. Ahmed Aboud & Ahmed Diab, 2022. "Ownership Characteristics and Financial Performance: Evidence from Chinese Split-Share Structure Reform," Sustainability, MDPI, vol. 14(12), pages 1-18, June.
    15. Kun Wang & Greg Shailer, 2015. "Ownership Concentration And Firm Performance In Emerging Markets: A Meta-Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 29(2), pages 199-229, April.
    16. Juan Manuel San Martín Reyna, 2012. "An Empirical Examination of Ownership Structure, Earnings Management and Growth Opportunities in Mexican Market," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 2(7), pages 103-123, December.
    17. Luc Laeven & Ross Levine, 2008. "Complex Ownership Structures and Corporate Valuations," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 579-604, April.
    18. Weiß, Christian, 2010. "The Ownership Concentration of Firms: Three Essays on the Determinants and Effects," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 30247.
    19. repec:dau:papers:123456789/5922 is not listed on IDEAS
    20. San Martin-Reyna, J.M. & Duran-Encalada, Jorge A., 2012. "The relationship among family business, corporate governance and firm performance: Evidence from the Mexican stock exchange," Journal of Family Business Strategy, Elsevier, vol. 3(2), pages 106-117.
    21. Sanjana Bhakar & Priti Sharma & Sanjiv Kumar, 2024. "Ownership Structure and Firm Performance: A Comprehensive Review and Empirical Analysis," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(4), pages 19824-19865, December.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:iimkoz:v:14:y:2025:i:1:p:75-87. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.