Passive Ownership and Earnings Manipulation

• In Event: Earnings Management

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 firms employ one of the four largest auditing firms. The evidence is consistent with the notion that passive owners act as monitors, but relinquish their monitoring role to the Big 4 auditing firms. Passive ownership may offer greater monitoring benefit to the firms with high M-Scores than firms with low M-Scores.

Authors

• Ahmed Baig, Texas Tech University

• Jared DeLisle, Utah State University

• Gulnara R Zaynutdinova, West Virginia University