Ownership Structure and Earnings Management in Malaysian Listed Companies: The Size Effect

According to the agency theory, separation of ownership and control gives rise to manager’s incentives to select and apply accounting estimates and techniques that can increase their own wealth. This issue has become more important in recent years as more firms are listed on stock exchanges as public firms. This study examines the association between the level of managerial ownership and earnings management activities, represented by the magnitude of discretionary accounting accruals in Malaysian listed firms. The results show that managerial ownership is negatively associated with the magnitude of accounting accruals. However, this study finds that managerial ownership is less important in large-sized firms compared to small-sized firms. This finding suggests that large-sized firms demand and use better corporate governance mechanisms due to higher agency conflicts, and, therefore, less managerial ownership is needed for control. As part of the ownership structure, this study also examines the roles of block and foreign ownerships in relation to the magnitude of discretionary accounting accruals.