Passive Ownership and Earnings Manipulation

• In Event: Financial Reporting--Profit and Loss

Abstract

We examine the relation between passive ownership and financial reporting quality measured by Beneish’s (1999) earnings’ manipulation score (M-score). We find that passive ownership is negatively related to M-score and to the likelihood of being designated as a “manipulator” firm. However, these relations are muted when one of the four largest auditing firms audits the firm in the previous year. The evidence is consistent with the notion that passive owners act as monitors, but relinquish their monitoring role to the Big 4 auditing firms. We also find that higher passive ownership for the lowest M-score quintile yields higher risk-adjusted returns.

Authors

• Gulnara Rashatovna Zaynutdinova, West Virginia University

• Ahmed Baig, Texas Tech University

• Jared DeLisle, Utah State University