Block Holders and earnings

• In Event: Financial Accounting and Reporting 11

Abstract

This study surveyed and attempted to reconcile the differences between prior studies on block holders (large shareholders) and their effect on firm value through earnings management. The study was motivated by the lack of consensus as to whether block holders have a positive or negative influence on firm value. Block holders will have a lot to lose (gain) when firms collapse (prosper) through earnings management. Shareholders also have a part to play in earnings management. Shareholders reward firms that are quality or have potential while they tend to discount non-quality firms. Investors tended to vote with their feet. The larger shareholders however were more sophisticated and had the ability to discount firms and vice versa depending on the information. This study found that block holders trades can be used as a signal about the firms quality to the market. The market regards Block holder selling as a signal that the stock is overvalued and discounts the price accordingly. The market does not however regard block holders as having the ability to influence earnings management.

Author

• Loretta Baryeh, Albright College