Ownership structure and Earnings Management in Emerging

Markets: the Case of Jordan

By
Nedal Al-Fayoumi
Department of Finance
Faculty of Business
University of Jordan
e-mail: nfayoumi@ju.edu.jo
Bana Abuzayed
Talal Abu-Ghazaleh Collage of Business
German Jordanian University
e-mail: bana.abuzayed@gju.edu.jo
David Alexander
Birmingham Business School
University of Birmingham, UK
e-mail: d.j.a.alexander@bham.ac.uk

Abstract
This study examines the relationship between earnings management and
ownership structure for a sample of Jordanian industrial firms during the period
2001-2005. Earnings management is measured by discretionary accruals. The
three types of ownership studied are insiders, institutions and block-holders.
Using the Generalized Method of Moment (GMM), the results indicate that
insider ownership is significant and positively affect earnings management. This
result is consistent with the entrenchment hypothesis which states that insider
ownership can become ineffective in aligning insiders to take value-maximizing
decisions.
Further analysis shows insignificant role of institutions and block-holder
in monitoring managerial behaviour earnings management. Our findings have
important policy implications since they support the encouraging for applying
corporate governance principles in order to motivate institutions and block-

holders to provide effective monitoring of managers in Jordanian firms. As a

result, the reliability and transparency of reported earnings may be enhanced.
Key Words: Earnings management, Discretionary Accruals, Ownership Structure,
Size.

1.

Introduction
The global markets crisis of 2008 has claims a vast body of research on

financial information quality and corporate control. In corporations, finance and

management are usually separated. However, this separation action poses two
conflicts. First, fund suppliers face collective action problems preventing them to
monitor and discipline managers of the company they are investors of (see
Macey, 1998). Second, managers need to convince market participants (current
and potential) of the firm performance, in order to be able to allocate enough
funds for the firm investments. Since the value of these investments is tied to the
firm, this value depends on the future prospects of the business relationship
between the firm and its suppliers. Consequently, the perception of these
stakeholders about the firms future prospects affects their incentive to
undertake such investments. From this point of view, researchers suggest that
managers may engage to earnings management to influence stakeholders
(Graham et al., 2005).
There is no consensus on the definition of earnings management (Beneish,
2001). For example, Davidson et al., (1989) cited in Schipper (1989, p. 92) defined
earnings management as the process of taking deliberate steps within the
constraints of Generally Accepted Accounting Principles to bring about a desired
level of reported income. Healy and Wahlen (1999) state that "earnings
management occurs when managers use judgment in financial reporting in
structuring transactions to alter financial reports, to either mislead some

stakeholders about the underlying economic performance of the company, or to

influence contractual outcomes that depends on reported accounting".
Earnings management occurs in three ways: (1) via the structuring of
certain revenue and/or expense transactions; (2) via changes in accounting
procedures; and/or (3) via accruals management (McNichols and Wilson 1988,
and Schipper 1989). Of the above mentioned earnings management techniques,
accruals management is the most damaging to the usefulness of accounting
reports because investors are unaware of the extent of such accruals (Mitra and
Rodrigue , 2002). Accrual is defined as the difference between the earnings and
cash flow from operating activities. Accruals can be further classified into nondiscretionary accruals and discretionary accruals. While non-discretionary
accruals are accounting adjustments to the firms cash flows mandated by the
accounting standard-setting bodies, discretionary accruals are adjustments to
cash flows selected by the managers (see Rao and Dandale, 2008)
A number of previous studies attempt to examine whether earnings
management exist in firms reports (Healy, 1985; Burgstahler and Dichev, 1997;
and DeAngelo et al.,

1994), endeavor to determine the types of earnings

management (Sirgar and Utama, 2008; and Beneish, 2001), or questioned the
motives behind earnings management (Healy and Wahen, 1999). Factors like
management compensation contract incentives (Guidry et al., 1999, and Dechow
and Solan 1991), regulatory motivations (Key, 1997), capital market motivations
(Teoh et al., 1998), and external contract incentives (Watts and Zimmerman,
1986) have been examined to interpret managers behavior towards earnings
management.
In this paper, we are turning our focus on the relationship between
ownership structure and earnings management practices among firms operating
in an emerging market. With globalalization of business and financial markets,

there has been strong demand for quality of information from firms across
countries so that investors can conduct comparative evaluation of risk and
return of firms in different countries (Jaggi and Leung, 2007). Consequently,
regulators in several countries outside the USA also started paying attention to
corporate governance and especially ownership structure components (e.g.,
insider managers, institutional investors, and block-holders) to improve the
quality of reported accounting information.
There is a public perception that earnings management is utilized
opportunistically by firm managers for their own private rather than for the
benefits of the stockholders. This misalignment of managers' and shareholders'
incentives could induce managers to use the flexibility provided by the
accounting standards to manage income opportunistically, thereby creating
distortions in the reported earnings (Jiraporn, 2008). However, a number of
academic studies have argued that earnings management may be beneficial
because it potentially enhances the information value of earnings. Managers may
exercise discretion over earnings to communicate private information to
stockholders and the public (e.g., Arya et al., 2003; Demski, 1998; Guay et al.,
1996).
The ability of managers to opportunistically manage reported earnings is
constrained by the effectiveness of external monitoring by stakeholders such as
institutional and external block-holders. These investors have the opportunity,
resources, and ability to monitor, discipline, and influence managers of firms
(Monks and Minow, 1995). Whether they use these powers is partially a function
of the size of their individual or collective shareholdings (Chung et al., 2002).
And this implies less opportunity for accruals management or earnings
manipulation (see Yeo et al. (2002) and De Bos and Donker, 2004). This will be
especially the case when major stakeholders know managers incentives for
earnings management. If managers have no self-serving incentives to use

discretionary accounting accruals, these stakeholders will be less inclined to

monitor discretionary accounting choices (Chung et al, 2002).
Yet many argue that institutions do not monitor effectively because they
either lack expertise or suffer from free rider problems among themselves
(Admat et al., 1999), or strategically ally with the management (Pound, 1988). A
similar argument can be made for the individual block-holders (Jung and Kwon,
2002).
This study contributes to the literature in the following ways. First, from
the previous literature it appears that there is no general agreement regarding
the effect of ownership structure on earnings management. Therefore, this study
investigates the determinants of earnings management activities and extends the
very limited research on the association between ownership structure and
earnings management. Unlike most existing research, which usually studies just
one aspect of ownership structure, we focus on three ownership categories:
insiders, institutions, and block-holders.
Second, it represents the first known study, to the best of our knowledge
that examines the relationship between ownership structure and earnings
management in Jordan. Jordan has been selected in the current study because
recently it has displayed a significant interest in consolidating the pillars of
corporate governance. Additionally, we use Jordanian data because they
generally reflect an institutional setting similar to many emerging countries,
where a high share of insider ownership, weak investor rights and less mature
block-shareholders are prevalent. Fundamental stakeholders in the Jordanian
corporations include families, banks, social security institution, and individual
investors. Thus, this study provides empirical evidence to assess the merits of
calls for different types of investors to play a greater role in corporate
governance practices.

Third, it provides further evidence on the possibility of coexistence of the

opportunistic and informative managerial ownership in addition to active and
myopic institutional and block-holders ownership and their differential
associations with earnings management. Understanding the nature of these
associations is important for portfolio managers and decisions makers because
they may convey information about the quality for financial information and
firm value.
The paper is structured as follows: Section 2 gives a brief overview of
accounting system in Jordan. Section 3 presents the theoretical background.
Section 4 summarizes earnings management literature. Section 5 discusses the
data and methodology, while section 6 reports the main results. Finally, section 7
summarize and concludes this paper.

2.

The Accounting System in Jordan

Jordan has a political stability in a very volatile region, a liberal economy,

and relatively advanced stock market.

However, the Jordanian economy is

private sector oriented; the state ownership is relatively small. Recently, a series
of privatization initiatives have been implemented to reduce public shares in the
productive sectors.
All registered firms in Jordan are subjected to the obligation of
certification and publishing their accounts. Since 1987, a body is in charge of
checking the quality of the accounting information called the Jordanian
Association of Certified Public Accountants (JACPA). The certification and the
control of accounts in Jordan refer to the recommendations from the JACPA
which adopt International Accounting Standards. Only the auditors who have
received this certification are authorized to certify annual reports. In addition,

there are a number of internationally recognized accounting and auditing firms

in the kingdom. In general, government's accounting and auditing regulations
are regarded as being compatible with international standards.

Public shareholding companies were set up and their shares were traded
in, long before the setting up of the Jordanian Securities Market. In the early
thirties, the Jordanian public already subscribed to and traded in shares 1.
However, the Amman Financial Market (AFM) was established in 1978.
However, the passage of Securities Law No. 23 in 1997 was indeed a landmark
and a turning point for the Jordanian capital market. Three institutions
emerged: the Jordan Securities Commission (JSC), the Amman Stock Exchange
(ASE), and the Securities Depository Center (SDC)) out of what has been the
Amman Financial Market till 1997. The ASE is one of the largest stock markets
in the region that permits foreign investment (in year 2008, Market
Capitalization to GDP was about 226.3 per cent). Securities listed in ASE are
electronically traded.
According to the Jordanian Securities Commission (JSC) Law (23/1997)
and Directives of disclosures, auditing, and accounting standards (1/1998), all
entities subject to JSCs supervision are required to apply International
Financial Reporting Standards (IFRS)2. These Directives specify the information
required public shareholding companies to be disclosed and filed with the
Commission for the purpose of enhancing transparency. Public shareholding

Where the Arab Bank was the first public shareholding company to be established in Jordan in 1930, the
first corporate bonds were issued in the early sixties. See the Jordan Security Commission web site at
http://www.jsc.gov.jo/
2
IFRS refers to all International Accounting Standards (IAS) and related interpretations issued by the
former International Accounting Standards Committee (IASC), and the International Financial Reporting
Standards (IFRS) and related interpretations issued by IASCs successor body, International Accounting
Standards Board (IASB).

companies are required to apply the International Auditing and Accounting

Standards under the supervision of the Jordan Security Commission (JSC) 3.
Firms operating in Jordan are required to submit annual reports and
announce yearly statements within a period not exceeding 3 months after end of
its fiscal year and to announce its half yearly statement within a period not
exceeding one month after the end of the mid-year. Additionally, these directives
contain chapter on insider trading and how they are obliged to submit to the JSC
material information related to the dealings. In 2002, a new Securities Law
number 76 has been issued, which authorized setting up other stock exchanges
and allowed forming an independent investor protection fund, stricter ethical
and professional codes, and a more stringent observance of the rule of law (ASE,
2009). By December 2008, the exchange recorded 5,442.3 million shares traded 4.
The Accountancy Profession Law (APL) 73/2003 was issued in 2003.
Important features of the APL include establishment of a High Council for
Accounting and Auditing headed by the Minister of Industries and Trade, and
the creation of an improved JACPA. However, Rahman and Waly (2004) claimed
for more clarification and refinement in the law in addition to upgrade its
contents with the new global developments5. Given that more robust auditing
should capture any earnings management practices, this study tries to bring
evidence that the level of earnings management and though the quality of
reported financial information are influenced by firms ownership structure.

The Jordan Securities Commission is the regulator of the capital market. Its mission is reforming and
developing legislation and regulations, emphasizing transparency and disclosure, revitalization Jordans
investment culture, encouraging and protecting investors and most importantly enforcing the rule-of-law.
4
See ASE website at: www.ase.com.jo/
5
They state "the term practicing professional needs to be better defined; the
provision on auditor rotation gives rise to ambiguity about rotation of partners or
firms; and it appears to be impractical to implement the provision on composition of
the Board of High Council having ministers without the same right of proxy as
members of the High Council Board. While the Law focuses primarily and in great
depth on JACPA regulations and by law 4, it overlooks important elements that could
strengthen the auditing regulatory framework in Jordan, particularly auditors
independence. It does not include provisions specifically focusing on monitoring and
enforcement mechanisms for ensuring compliance with the applicable auditing
standards and code of ethics, not only in appearance but also in substance. .

3.

Theoretical Background
Mainly focusing on the effect of ownership structure on earnings

management (discretionary accruals), we account for the complexity of interests

represented in a given company, by consider the main dimensions of ownership
structure insiders, institutions and external block-holders .
The effect of managerial ownership (insiders) on incentives to act in the
interests of shareholders is inarticulate in the previous literature. The traditional
agency theory suggests that shareholdings held by managers help align their
interests with those of shareholders (Jensen and Meckling, 1976). This incentive,
alignment effect, is anticipated to have more impact as managerial ownership
increases, suggesting that as managerial ownership increases, efficient earnings
management may exist to improve earnings informativeness in communicating
of value-relevant information (Siregar and Utama, 2008). Thus, under the
convergence-of-interest hypothesis, insider ownership can be seen as a
mechanism to constrain the opportunistic behavior of managers and, therefore,
the discretionary accruals (a proxy of earnings management) is predicted to be
negatively associated with insider ownership (Warfield et al., 1995).
In contrast, when there is narrow separation between owners and
managers, managers face less pressure from financial markets to signal the firm
value to the market and they pay less consideration to the short-term financial
report (Jensen, 1986; Klassen, 1997); therefore, highly managerial ownership are
more likely to manipulate earnings, since this lack of market discipline may lead
insiders to make accounting choices that reflect personal motives rather than
firm economics (Sanchez-Ballesta and Garsa-Meca, 2007). In this context, Morck
et al., (1988) argue as managerial ownership increases, the managerial labour
market and the market for corporate control become less effective in aligning

managers to take value maximizing decisions. This is because high ownership by

management implies sufficient voting power to guarantee future employment.
Additionally, these managers have incentives to pursue self-interest nonvalue maximizing actions at the expense of shareholder wealth. This managerial
behavior is consistent with the entrenchment hypothesis which states that high
levels of insider ownership can become ineffective in aligning insiders to take
value-maximizing decisions. Hence, this entrenchment effect potentially
confounds the agency theory predictions. As managerial ownership increases,
earnings management may increase (see Yeo et al., 2007,).
Warfield et al., (1995) indicate that this positive relationship is expected if
either accounting-based constraints mitigate managers' accounting choices or
higher ownership results from difficulties in accounting numbers measuring
performance as reflected in increased accruals variability.
The effect of institutional ownership on earnings management behavior
have been examined before (e.g. Velury and Jenkins, 2006; Balsam et al., 2002;
and Siregar and Utama 2008). It is possible to explain this effect based on an
active monitoring hypothesis and passive hands-off hypothesis (see Koh, 2003).
Under an active monitoring hypothesis (Bushee, 1998 and Majumdar and
Nagarajan, 1997), institutional investors influence the monitoring mechanism a
firm uses, including the monitoring of earnings management activity. Academic
researchers believed that institutional investors who have large magnitude of
investments are more sophisticated investors. They are, on average, better
informed than individual investors due to their large-scale development and
analysis of private pre-disclosure information about firms. So, systematic
differences exist in the amount and precision of private information in the hands
of institutional and individual investors.
The higher level of informness of institutional investors also implies that
with the increase in institutional investor shareholdings in a firm, the

information asymmetry between shareholders and managers will decline thereby

making it more difficult for managers to manipulate earnings. Thus, earnings
management and institutional ownership is supposed to be negatively correlated
(Mitra, 2002). Under the passive hand hypothesis (Bhide, 1993 and Portter,
1992), the institutional investors are inherently short-term oriented. Such
investors are often referred to as myopic investors who focus mainly on current
earnings rather than long-term earnings.
This orientation deters institutional investors from incurring monitoring
costs and to concentrate on current earnings news, and that managers have
incentives to manage earnings aggressively (Koh, 2003).
The monitoring by substantial external bock-shareholders is similar to the
effect of institutional ownership on earnings management (Yeo, 2007).Two
competing views exist. First, outside block-holders require a higher return from
their investment and pose a bigger threat of intervention to the firm's
management. Thus, they might not be as inclined to encourage management to
report high quality earnings (Velury and Jenkine, 2006 and Zhong et al., 2007).
Second, outside block-holders, with higher motivation and ability to monitor
managers' actions than small shareholders, might reduce earnings management
through their closer monitoring (Dechow et al., 1996).
4. Literature Review
Previous studies bring evidence that ownership structure influences the
monitoring mechanism a company uses including the monitoring of earnings
management activities. Wang (2006) states that ownership structure has
important effect on reported earnings. However, the influence of insiders,
institutional investors, block-holders and on the ability of managers to
manipulate earnings remains a controversial issue.

The literature discriminates between inside and outside holders (e.g.

Dempsey et al., 1993; and Warfield et al., 1995). Dempsey et al., (1993)
distinguish between owner-managed firms, in which managers own substantial
blocks of the firms' outstanding stocks, and external-controlled-firms, in which
one or more external block-holders own a substantial block of the firm's stocks
while the managers do not substantially own the firm's stocks. The study
suggests that large ownership by management is the underlying factor that
reduces earnings management where the existence of external block-holders does
not seem to significantly affect earnings management. In addition, Warfield et al.
(1995) provide evidence that managerial ownership is negatively related to the
magnitude of earnings management. Warfield et al. (1995) also find evidence
that the inverse relationship between managerial ownership and absolute
abnormal accruals becomes moderated in case of regulated firms. They suggest
that regulation provides monitoring on managers choice of making accrual
adjustment to manage earnings.
Sanchez-Ballesta and Garsa-Meca (2007) examine the relationship
between ownership structure and discretionary accruals for a sample of Spanish
non-financial companies. Their results support the hypothesis that insider
ownership contributes to the constraining earnings management when the
proportion of shares held by insiders is not too high. When insiders own a large
percentage of shares, however, they are entrenched and the relation between
insider ownership, discretionary accruals reverses. Morck et al., (1988) argue
that greater ownership would provide managers with deeper entrenchment and,
therefore, greater scope for opportunistic behavior (act in the interests of
shareholders). Gabrielsen et al. (2002) find a positive but non-significant relation
between managerial ownership and discretionary accruals in a sample of Danish
firms, which they attribute to the different institutional settings between the US
and Denmark.

The manner in which earnings management is associated with

institutional ownership is an empirical issue. Extant literature posits two
competing views on institutional investors. One group of the literature such as
El-Gazzar, 1998; Wahal and McConnell, 2000; Velury and Jenkins, 2006 among
many others, provide evidence indicating institutions are playing an active role
in monitoring and disciplining managerial discretion. On the other hand, the
second group of studies (e,g Porter 1992 and Bushee, 1998) alleges that frequent
trading and fragmented ownership discourage institutional from becoming
actively involved in the corporate governance of their portfolio firms (Grace et
al., 2005).
Chung et al., (2002) find evidence supporting that the presence of large
institutional shareholdings inhibit managers from increasing or decreasing
reported profits towards the managers desired level or range of profits. This
evidence is consistent with institutional investors monitoring and constraining
the self-serving behavior of corporate managers. Koh (2003) examines the
association between institutional ownership and income increasing discretionary
accruals and finds a concave association where (a) a positive association is found
at a lower institutional ownership region and (b) a negative association at a
higher institutional ownership region.
In a recent study, Koh (2007) extend the literature by classifying
institutional investors into transient or long-term by their investment horizons to
examine the association between institutional investor type and firms
discretionary earnings management strategies in two mutually exclusive settings
firms that (do not) use accruals to meet/beat earnings targets. The results
support the view that long-term institutional investors constrain accruals
management among firms that manage earnings to meet/beat earnings
benchmarks. This suggests long-term institutional investors can mitigate
aggressive earnings management among these firms. Transient institutional
ownership is not systematically associated with aggressive earnings management

and is evident only among firms that manage earnings to meet/beat their
earnings benchmarks.
On the other hand, external block-holders, are considered to be an
important external mechanism to influence earnings management. Jensen and
Meckling (1976) is one of the earliest studies that suggest monitoring by blockholders can be a way to reduce agency costs. Many subsequent studies have
suggested that external block-holders could effectively monitor management of
firms (Koch 1981, Mikkelson and Ruback 1985, Shleifer and Vishny 1986, and
Barclay and Holderness 1991).
The higher incentive of outside block-holders in monitoring managers'
actions potentially reduces earnings management by restricting managers'
discretion with financial reporting and/or mitigating their incentive to manage
earnings.
Dechow et al. (1996) suggests that outside block-holders are effective
monitors of managers' earnings overstatements that violate GAAP. Yeo et al.,
(2003) show a strong positive relationship between external unrelated blockholdings and earnings informativeness. However, McEachern (1975), Shleifer
and Vishny (1986), Holderness and Sheehan (1988), and Barclay and Holderness
(1991) among some others argue that outside block-holders may create extra
pressure for their firms' managers to engage in income-increasing earnings
management. Zhong et al., (2007) study the association between outside blockholder ownership and earnings management for NYSE firms. Their results
indicate that outside block-holder ownership is positively associated with
discretionary accruals for firms that face declining pre-managed earnings. Thus,
the evidence, consistent with the second view, suggests that outside block-holders
are not effective monitors of income-increasing earnings management that is
generally within the bounds of GAAP.

Although extent literature examined the determinants of earning

management, the evidences are mixed, and what are the determinants of firms'
earnings management remains an empirical issue. Therefore, this study
contributes to the literature by examining the effect of ownership structure on
earnings management behavior in an emerging market. This paper is examining
an important issue among research topics in accounting and finance. The
importance behind examining the determinants of earnings management is to
minimize potential wrongdoing, conflict, and a sense of mystery in accounting
information used by financial managers because, as argued by Lo (2007), highly
managed earnings have low quality.

5. Research Design
In this section we will develop the study hypotheses, describe the main
models used in this paper, clarify the operational definition of the variables used,
and explain the procedures of sample selection.
5.1 Hypotheses and Research Models
The aim of this study is to test the association between ownership
structure and earnings management and to examine if this association differs
between small and large firms.
The standard assumption is that each of the ownership categories has
different objectives with implications for corporate strategy and performance
(Edwards and Nibler 2000; Morck et al. 2000; Thomsen and Pedersen 2000).

Therefore, each ownership category is expected to influence earnings

management differently.
We examine whether each of the ownership structure categories (insiders,
external block-holders, and institutional investors) is associated with earnings
management after controlling for factors that are likely to impact earnings
management such as size, the level of debt, firm growth, and profitability. Our
primary hypotheses (stated in null form) are as follows:
H1:

Earnings management is not associated with the level of insiders'

ownership.

H2:

Earnings management is not associated with the level of institutional

ownership.

H3:

Earnings management is not associated with the level of external blockholders' ownership.

We employ Models 1to 4 to examine the above mentioned hypotheses:

EM it 1 2 INSI it 3Contit it

(1)

EM it 1 2 EBH it 3Contit it

(2)

EM it 1 2 INSTit 3Contit it

(3)

EM it 1 2 INSI it 3 EBH it 4 INSTit 5Contit it

(4)

Where, EMit is earnings management measured by discretionary accruals

for firm i at time t, INSIit is insiders (managerial) ownership variable, INST it is
institutional ownership variable for firm i at time t, and EBHit is external blockholders' ownership variable for firm i time t, and. Contit stands for control
variables and it is the error term.

Finally, we examined the interaction between the significant ownership

category and size to check whether the association between earnings
management and ownership structure differs among large and small firms. The
following hypothesis in its null form can be stated as follows:
H4:

The association between earnings management and ownership structure is

not differ among firms of different size.
The above formulated hypothesis is examined using the following model:

EM it 1 2 OS it * SIZEit 3Cont it it

(5)

Where, OSit stands for one or more significant ownership categories for
firm i at time t and SIZEit is firm i size at time t.
To examine the above mentioned tests, Ordinary Least Squares (OLS)
estimation may be used in this study. However, Hsiao (1985) shows that in the
presence of firm specific effects, OLS coefficients are biased assuming that covariances between the independent variables and the firm specific variable and
the disturbance terms it are nonzero. If variables are endogenous, using OLS
estimates may lead to inconsistency. Therefore, we employ a dynamic panel, the
Generalized Method of Moment (GMM) estimator proposed by Arellano and
Bond (1991).
Under GMM, the consistency of the estimator depends on the validity of
the instruments and the assumption that the differenced error terms do not
exhibit second order serial correlation. To test these assumptions, Arellano and
Bond proposed a Sargan test of overidentifying restrictions, which tested the
overall validity of the instruments by analyzing the sample analog of the moment
conditions used in the estimation procedure (Liu and Hsu, 2006). Besides, they
also tested the assumption of no second-order serial correlation. Failure to reject

the null hypotheses of both tests gives support to our estimation procedure 6. All
regressors are treated as strictly exogenous except the lagged dependent
variables. Therefore, we conduct the analyses with lagged independent variables
dated t2 and earlier together with the lagged changes of endogenous variables,
and exogenous variables used as instruments variables.
5.2 Definition of Variables
5.2.1 Measuring Earnings Management
In this study, we use accounting accruals approach to measure earnings
management. Accruals includes a wide range of earnings management
techniques available to managers when preparing financial statements, such as,
inter alia, accounting policy choices, and accounting estimates (Grace et al.,
2005; and Fields et al., 2001)7.
In general, accounting accruals, which is the difference between earnings
and cash flows from operating activities, have been used in different terms in the
previous literature. While Healy (1995) used total accruals to measure earnings
management, subsequent studies attempt to separate them into components,
discretionary and non discretionary accruals. Discretionary accruals are
extensively used to demonstrate that managers transfer their accounting
earnings from one period to another. In other words, managers exercise their
discretion over an opportunity set of accrual choices within GAAP, for example,
choosing the depreciation method of fixed assets (Healy, 1995). Additionally, total
accruals include non-discretionary accruals which reflect none manipulated
accounting accruals items because they are out of managers control.
6

See also the discussion in Baltagi (2008).

As stated by Aljifiri (2007, p.77), accounting accruals changes may be less costly when compared to
accounting methods changes as a mean to transferred earnings between periods and maybe more difficult to
detect by auditors. The two main components of accounting accruals (discretionary and non discretionary
accruals) are not directly observed. Therefore, all studies have used an indirect estimation of discretionary
accruals.
7

Consistent with the previous literature on earnings management (Jones,

1991; and Subramanyam, 1996), we used discretionary accruals to measure the
extent of earnings management. Following recent literature (e.g. Jaggi and
Leung 2007), this study uses the cross sectional variation of the modified Jones
model (Jones, 1991; and Dechow et al., 1995) to obtain a proxy for discretionary
accruals. Dechow et al., 1995; Guay et al., 1996 among some others argue that
modified Jones model is the most powerful model for estimating discretionary
accruals among the existing models. Furthermore, Bartove et al., (2000) indicate
that the cross sectional model outperforms its time- series counterpart in
detecting accruals management.
The dependent variable in our model, earnings management, is measured
as discretionary accruals using a cross-sectional version of the modified Jones
model (Dechow et al. 1995) as follows:
First, total accruals (TACC) is defined in this study as the difference
between net income before extraordinary items (NI) and cash flow from
operating activities (OCF):TACC NI OCF

(6)

Equation 2 below is estimated for each firm and fiscal year combination
TACC it / Ait 1 t [1 / Ait 1 ] 1i [REVit RECit ) / Ait 1 ] 2 i [ PPEit / Ait 1 ] it

(7)
Where, TACC is the total accrual, REV it the changes in operating
revenues, REC is the change in net receivables, PPE is gross property, plants
and equipments, t and t-1 are time subscripts and i is the firm subscript.
Changes in revenues is included to control for the economic circumstances
of a firm; whilst gross property, plant and equipment are included to control for
the portion of total accruals related to non-discretionary depreciation expenses
(Jones, 1991). Dechow et al., (1995) modified the Jones (1991) model by removing
the discretionary components of revenues through changes in accounts
receivable. Firms are considered to have engaged in income increasing
(decreasing) discretionary accruals if they have positive (negative) estimated

discretionary accruals. Earning is the reported earnings before interest and tax
and before extraordinary items Earnings target is the prior year earnings level
(Degeorge et al., 1999). Non-discretionary earning (NDE) is earnings less
discretionary accruals (DACC). To estimate the coefficient values, an Ordinary
Least Squares (OLS) regression with no intercept is employed.
The Difference between total accruals and the non-discretionary components of
accruals is considered as discretionary accruals (DACC) as stated below:
DACCit TACC it / Ait 1 [ t (1 / Ait 1 )] 1i [(REVit RECit ) / Ait 1 ] 2 i [ PPEit / Ait 1 ]

(8)
All variables are scaled by prior year total assets At-1 to control for
heteroscedastisity.
5.2.2 Measuring Ownership Structure and Firm Size
Insider ownership (INSI), external block-holders ownership (EBH) and
institutional ownership (INST) were collected from the annual reports of the
sampled firms in the Amman Stock Exchange (ASE) data base 8. INSI was
defined as the percentage of shares held by officers or directors within the firm
and their families (see Karathanssis and Drakos, 2004).
EBH was measured as the percent of shares held by the individual blockholders9. For each party, we only consider the ownership percentage that
represents 5% or more of firm's equity share capital. INST was measured as the
percent of shares held by the institutions, which includes shares owned through
social security and other funds. Consistent with Koh (2003), the following
organizations are classified as institutional investors: insurance companies (life
and non-life), pension funds, investment companies, and financial institutions
including banks.

Government ownership have been excluded because The Jordanian economy is private sector oriented,
the state ownership is relatively small.
9
Individual external block-holders exclude managerial owners.

Additionally, firms' accruals management decisions are likely to be

influenced by firms' size. The size hypothesis (Watts and Zimmerman, 1986)
posits that large firms are more politically visible and are more likely to manage
earnings to reduce their political visibility (Moses, 1987; Hsu and Koh 2005).
However, Ashari et al., (1994, p. 293) has an opposite view and argues that more
information is available about larger firms, which are closely scrutinized by
analysts and investors Smoothed income signals from larger firms add little
value; accordingly, they have less incentive to smooth income (Atik, 2008). Thus,
there is no specific prediction on the association between firm size and
discretionary accruals. This study uses natural logarithm of total assets as a
proxy for firm size (SIZE).
5.2.3Measuring Other Variables
Given that firms' accruals management decisions are likely to be
influenced by factors other than the three ownership categories (INSI, EBH,
INST) or the size of the firm, several control variables are introduced to capture
the incentives that have

been found to influence managers' discretionary

accounting choices. The control variables included in this study are firm
financial leverage (LEV), profitability (ROE), and growth (GROW).

Firms financial Leverage, measured as the ratio of debt to assets, is

included, as a proxy for risk, because managers are more likely to exercise their
accounting discretion granted by GAAP when they are closer to default on debt
covenants (Press and Weintrop, 1990). Trueman and Titman (1988, p. 128) argue
that managing earnings enables managers to reduce estimates of various
claimants of the firm about the volatility of its earnings process and so lowers
their assessment of the probability of bankruptcy.

Consequently, as discussed

by Atik (2008), this provides an opportunity to borrow at lower interest rates and

decreases cost of capital. Consistent with this debt hypothesis, we expect that
managers in more leveraged firms are more likely to adopt aggressive earnings
management techniques to prevent violation of debt covenants (Watts and
Zeimmerman, 1986).
Since accruals could also related to growth opportunity, this variable
(Grow), measured as year-over-year sales changes is considered in our
estimation. This variable will be used as a control for demand conditions and
product-cycle effects on profitability. As argued by Chan et al., (2001) and Lui
(2004), firms with the highest growth opportunities usually have higher valuation
ratio and higher growth because the market uses the dividend discount models to
value the firm equity (Lee et al., 2005). Firms with the highest growth
opportunities are likely to have more private information about these prospects,
which would exacerbate the problems of asymmetric information. Therefore,
insiders try to reveal this relevant information through financial statements in
which earnings have been managed to signal the profitable projects available to
the firm (Heay and Palepu, 2003). Our prediction is, consistent with the before
mentioned discussion, firms with higher growth rate have higher discretionary
accruals.
Finally, profitability, measured by return on equity, is included to control
the relationship between earnings management and ownership structure.
Orlitzky et al., (2003, p. 408), argues that indicators such as Return on Assets
(ROA) and Return on Equity (ROE) are subject to managers discretionary
allocations of funds to different projects and policy choices, and thus reflect
internal decision making capabilities and managerial performance rather than
external market responses to organizational actions. Thus, in this study ROE is
included as a proxy for profitability. As examined by Chen et al., (2006), listed
firms with lower profitability have higher behavior of earnings management.

Therefore, we expect a negative relation between earnings management and

profitability10.

Table 1 summarizes the definitions and interpretations of the study variables.

5.3 Sample Selection

The sample used in this study comprises the listed industrial firms in
Amman stock exchange between 2001 and 2005. The industrial sector in Jordan
is very important to the economy, as a source of employment and economic
growth. Therefore, understanding the characteristics of earnings management
this sector is vital to enhance the reliability and transparency of reported
earnings, and therefore improve the ability of investors to determine the fair
value.
Data are collected manually from Jordanian shareholding companies
guide issued by Amman Stock Exchange and annual reports of Jordanian
shareholding companies. The firms selected are well settled companies in the
Jordanian economy; they are the major players in the Jordanian industrial
sector. At least for the time of the study these companies have continued to work
progressively, they have a high trading volume and no merging or acquisition
were announced for any of the sample companies.
Additionally, firms with insufficient data for ownership and firms with
inadequate financial data are excluded from the sample. After applying these
conditions, 39 were included in the analysis, which represents around 64% of
Jordanian Industrial firms. The final sample consists of 195 firm-year
10

Some literature uses other factors like research & development outlays and advertising expenditures,
unfortunately in this thesis will not be included due to the absence of reliable data and are available for
limited number of firms.

observations for accrual estimation and empirical analysis. Of these, 94(101)

firms have positive (negative) discretionary accruals.
6. Results
6.1 Descriptive Statistics
Table 2 reports the descriptive statistics for the dependent and explanatory
variables.
While the discretionary accruals, DACC, ranges between about 34 per
cent and -39 percent, the mean and standard deviation for it are about 0.12%,
10%, respectively. On average, the sample firms have positive discretionary
accruals. This may indicate that Jordanian firms in our sample are managing
their earnings upwardly. Most prominent result is the high standard deviation of
growth (about 53%) relative to the standard deviation of the other variables
included into our models (which range between 10% and 26%). This high
standard deviation of growth may indicate that our sample firms are of different
size and maturity. This is supported by the high standard deviation of size (1.23),
and this justified the inclusion of size and growth in our models.
On the other hand, insider investors, on average, hold around 35 per cent
of total shares outstanding of the sample firms. Comparing this ownership
category with the other categories, we find about 20 per cent on average are
external block-holders. The level of external block-holders is far from what Hso
and Koh (2005) is reported for the period from to 1993 to 1997 within Australian
firms (about 12 per cent). However, Institutional investors represent 23 per cent
of shareholders on average. Again this is quite less than the average institutional
ownership level reported by Koh (2003, 2007) of 47-48 per cent between 1993
and 1997 inclusive, and Stapledon (1998) of around 49 per cent on 1997 for more
developed countries.

These statistics are not surprising due to the nature of

emerging markets investing. Most of the listed firms are owned and controlled
by individuals rather than institutional. This is supported by the reported
institutional investors in Indonesian firms, which account for only 7% of total
shareholding for the period from 1994 to 2002 (see Siregar and Utama, 2008).
The average leverage ratio for the sample firms is about 38%. While this
average leverage ratio was far from what is found by Hso and Koh (2005),
around 54 per cent, it is near to the average leverage found in China for the
period in 1994, about 34 percent (see Wei and Verela, 2003).
Pearson correlations between the explanatory variables are documented in Table
3.
DACC has a positive (negative) and significant correlation with insider
(institutional) investors, which is consistent with the nature of managers.
Managers seems to engage more (less) in manipulating their accounting
information and smoothing their income the more are the insiders (institutional)
holding of stocks. On the other hand, external block-holders, growth and
leverage seem to be not correlated with the earnings management behavior of
managers. Size (SIZE) is positively associated with leverage (LEV), consistent
with Cotter's (1998) finding that larger firms have higher leverage constraint
levels. A negative correlation between profitability (ROE) and DACC indicates
that more profitable firms are less likely to witness earnings management.
Negative and significant correlation between EBH and ROE signify that the
more the concentrated the ownership the less the profitability. However, larger
firms seem to be more profitable firms (positive and significant correlation
between SIZE and ROE).
6.2 Ownership Structure and Earnings Management

The results of the regression models, which test the relation between
ownership structure and earnings management, are presented in Table 4.

The first three models are examined to test the relation between each
ownership structure category (INSI, INST, and EBH) and earnings management
measured by DACC. Then models 4 and 5 look at the effect of the three
ownership categories collectively. We control for a number of factors that may
affect earnings management, like SIZE, LEV, ROE and GROW.

The hypothesised concave association between DACC and INSI is found

and is statitically significant. The coefficient of INSI in models 1 is positive and
equals to 0.0554 (see row 3 in Table 4). We interpret the results as support for
Morck et al., (1988) hypothesis that management entrenchment could occure
when insider holdings are high. This suggest that the managerial ownership has
a determinantal effect on earnings management. This result approved the agency
problem that appears between managers and shareholders in Jordanian firms.
Managers have weak incentives to act in shareholders interest. Managers use
their discrition to maximize their utility, thereby grabing earnings (see

Subramanyam, 1996). Based on these results, we can reject the first null
hypothesis.

Looking at the relation btween institutional ownership and discritionary

accruals, in model 2, a negtive relation emerged. However, it has not been
supported statistically. This insignificant association indicates that institutional
investors are not a magor cosideration in managers' aggressive earnings
management strategy. This result is not serprising. In Jordan, most institutional
owners of social security institutions (government pention funds) and other small
investment and financial firms. There is no existence of developed mutual funds
or investment companies. As a result, institutional investors in Jordan are not
effective in constraning managerial behaviour of earnings management.
Consistent with the argument that institutional investors in Jordan are
short-term oriented and create incentives for managers of their portfolio firms to
manage earnings aggressively. As these institutional investors focus excessively
on current earnings performance (see Koh, 2003). The result of non influencial
effect of institutional investors on earnings management found in this study is
not consistent with what Velury and Jenkins (2006) found in a sample of US
based firms. However, similar evidence found by Siregar and Utama (2008) for
Indonisian firms. The same result is evident regarding the relationship between

ernings management and external block-holders. The negative coefficient value

of the EBH variable in model 3 of -0.046 is not statistially significant. Therefore,
the propotion of external block-holders has no influence on management of
earnings.

Based on the above mentioned results, our second and third

hypothesis cann't be rejected.

In addition, model 4 brings togather the three ownership categories. All
sighnes remain the same to confirm the previos results. While the level of insider
investors continued to be influential factor on earnings management, the other
wonership categories (INST and EBH) continued to be not important variables,
and have no effect on the level of earnings management within the Jordanian
firms.
Regarding the other variables, included as controle variables, we found
that firms growth (GROW) and leverage (LEV) are not significantly affecting
the quality of accounting information. Managers in Jordanian firms with higher
sales growth and high financial leverage have no more (less) incentives to
manage their income. On the other side, the association between earnings
management and profitability within the Jordanian firms are different than
what we expect. Firms with higher profitability measured by ROE are ingaged
more with earnings managemet (positive and significant coefficients of ROE in 3

out of 5 models, Table 4). This positive relation is not strange and consistent with
Chen and Yuan (2004) findings.
One of the explanation for this positive relation is that Amman Stock
Exchange (ASE) required firms to achieve a minimum profitability to continue
to be listed or apply for permission to issue additional shares (Directives for
11

Listing Securities on the Amman Stock Exchange, 2004) .

Size appears to affect earnings management significantly (significant SIZE

coeffecients in models 1 to 4). However, we find that larger Jordanian firms have
less earnings quality since they engage more in earnings management.
Furthermore, the size effect is further examined by introducing one
interaction variable in model 5. The only influencial ownership category, insider
investors, is multiples by firm size (INSI*SIZE) to develope the interaction
variable. The coefficient is positive and statitically significant. This result is
quanitavely the same as the main finding of models 1 to 4. It confirms that
larger firms are engaging more in earnings manipulation. Based on these results,
we can reject the fourth null hypothesis.
Finally, in order to check the accuracy of our models, we apply
autocorrelation and Sargan tests. In all models, autocorrelation 1 test brings
evidence for negative first order serial correlation. However, autocorrelation 2
test suggests that second order serial correlation is not supported. These results
11

See the web site of ASE at http:// www. exchange.jo

are not violating the assumptions of GMM estimation because as mentioned by

Arellano and Bond (1991), the first order residuals autocorrelation need not to
be zero, but the consistency of the GMM estimators relied heavily on the
assumption that the second order residuals autocorrelation should equal zero.
The Wald test of the joint significance of the regressors is satisfied suggesting
that aggregate factors exert a significant influence on DACC levels in the firms
reported information in all models. The Sargan test also indicates that the
instruments used in the GMM estimation are valid in all models. This is
consistent with the assumption that the instruments used are not correlated with
the error term.

7. Conclusions
In this paper, we use Generalized Method of Moment (GMM)
methodology to examine the relationship between ownership structure and
earnings management (discretionary accruals) for a sample of Jordanian
industrial companies listed on Amman Stock Exchange during the period 2000
2005. In our first analysis we find a positive and significant relationship between
insiders' ownership and earnings management, which supports Morck et al.,
(1988) who argue that greater ownership would provide managers with deeper
entrenchment and, therefore, greater scope for opportunistic behavior. This

finding indicates that Jordanian insiders tend to make discretionary accounting

choices. In this case, we expect earnings quality and earnings informativeness to
decrease. This result is not surprising since the ownerlargest shareholder in
Jordan, typically a founder or his immediate family, usually participates in firm
management directly or indirectly, and influences most of the management
decisions.
We then examine the role of institutions and block-holders, proposing two
opposing hypotheses- an active monitoring role and a passive hand hypothesis.
We find insignificant relationship between each of these two variables and
earnings management. These results suggest that institutions and block-holders
generally play a myopic role in Jordanian companies. They don't not monitor
effectively because they may either lack expertise or suffer from free rider
problems among themselves (Admat et al., 1994), or strategically ally with the
management (Pound, 1988).

Regarding the controle variables, we found that firms growth and

leverage are not significantly affecting the quality of accounting information.
However, ther is no conclusive results for profitabiliy. Size appears to affect
earnings management significantly and larger firms are engaging more in
earnings manipulation.

Our findings have important policy implications since they support the
encouraging for applying corporate governance principles in order to motivate
institutions and block-holders to provide effective monitoring of earnings
management in Jordanian firms, especially those with a large size. These firms
operate in the business environment of insider ownership domination and

control, where managers have greater motivation to manage earnings to

maximize their private benefits. This suggests that similar efforts in other
countries in the region would be rewarding in controlling the management of
reported earnings and enhance the reliability and transparency of reported
earnings in order to promote economic efficiency.

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informativeness of earnings, Journal of Business Finance & Accounting 29:
1023-1046.
Wang, D. 2006. "Founding family ownership and earnings quality", Journal of
Accounting and Research 44: 619655.
Wei, Z., A., Varela. 2003. "State equity ownership and firm market performance:
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Zhong, K., Donald W., and X., Zheng. 2007. "The effect of monitoring by outside
blockholders on earnings management", Quarterly Journal of Business &
Economics 46:38-60

Table 1
Variables Definitions

Variable
Definition
Interpretation
A- Dependent Variable
DACC
Discretionary
Accruals Measures the managers' ability to transfer
measured using modified their accounting earnings from one period to
Jones model.
another (see Jones, 1991; and Subramanyam,
1996, and Jaggi and Leung 2007.
B- Independent variables
1- Test variables
INSI

INST

Insider ownership defined

as the percentage of
shares held by officers or
directors within the firm
and their families.

Based on convergence of interest hypothesis

(alignment effect), discretionary accruals is
predicted to be negatively associated with
insider ownership (see Warfiled et al., 1995).
In contrast, entrenchment hypothesis implies
that high level of insider ownership can
become ineffective in aligning insiders to
take value maximizing decisions. Therefore,
a positive relationship between earnings
management and managerial ownership may
exist. Yeo et al., (2007).
Institutional
investors' The
relationship
between
earnings
ownership measured as management and the level of institutional
the percent of shares held ownership is ambiguous. Under an active
by the institutions.
monitoring hypothesis (Bushee, 1998 and
Majumdar and Nagarajam, 1997), the higher
the level of institutional investors the lower
the earnings management. On the other hand,
passive hand hypothesis supports the positive
relationship between earnings management
and institutional ownership (see Bhid, 1993,
and Portter, 1992).

EBH

External
block-holders
measured as the percent
of shares held by the
individual block-holders
(excluding
managers).
Who ones 5% or more of
firm's
equity
share
capital.

Negative or Positive relationship between

EBH and DACC may exist. External owners
with higher motivation and ability to monitor
managers' actions might reduce DACC
through their closer monitoring (Dechow et
al., 1996). On the other side, EBH require
returns from their investment. Thus they
might encourage managers to increase
DACC (Velury and Jenkine2006 and Zhong
et al., 2007).

2- Control Variables
SIZE

ROE

GROW

LEV

Firms size measured by Large firms are likely to manage earnings to

the natural logarithm of reduce their political visibility (Moses, 1987;
total assets.
Hsu, and Koh 2005). However, Ashari et al.,
(1994, p. 293) has an opposite view and argue
that larger firms have less incentive to earnings
management (Atik, 2008).
Firm
profitability The lower profitability the lower the behavior
measured as Return on of earnings management. Therefore, we expect
Equity.
a negative relation between earnings
management and profitability (see Jiang
Yihong, 1999; and Chen et al., 2000).
Growth
opportunity Firms with higher growth rate are expected to
measured as year-over- have higher discretionary accruals (see Heay
year sales changes.
and Palepu, 2003).
Firms financial Leverage, Managers in more leveraged firms are more
measured as the ratio of likely
to
adopt
aggressive
earnings
debt to total assets.
management techniques to prevent violation of
debt covenants (Watts and Zeimmerman,
1986).
Table 2
Descriptive Statistics

Variable

Mean

Standard

Minimum

Maximum

Deviation
DACC

0.117%

10.098%

-38.700%

34.400%

INSI

38.053%

24.497%

6.330%

97.290%

EBH

20.301%

22.046%

2.14%

77.240%

INST

23.101%

25.935%

97.24%

ROE

6.1521%

10.573%

-55.960%

32.423%

SIZE

16.340

1.231

13.971

19.829

GROW

16.468%

52.745%

-85.329%

454.46%

LEV

35.667%

18.837%

5.302%

84.422%

DACC= discretionary accruals, DINSI= Insider ownership measured

as percentage of shares owned by board of directors their wives and children and
influential executives, EBH= External block holders measured as the sum of
shares that exceeds 5% for every individual share holder. INST= Institutional
block holder measured as the sum of shares that exceeds 5% for every
institutional share holder. SIZE= the size of the firm approximated by total
assets. GROW = Growth of the company approximated by percentage change in
sales. LEV= Leverage ratio calculated by total liabilities over total assets.

Variab DACC
le
DACC
INSI

0.146**

INSI

Table 3
Correlation Matrix
EBH
INST
ROE

SIZE

GRO
W

EBH
INST
ROE
SIZE
GRO
W
LEV

0.007

0.4692*
**
0.265**
0.136** *
0.125*
0.182**
0.095
0.499**
*
-0.074
-0.012
-0.076

0.197**

0.516**
*
-0.199** 0.259*
**
0.280** 0.295*
*
**

0.307**
*

0.105

-0.099

0.107

-0.016

0.135**

0.020

0.218**
*

0.306*
**

0.144
**

See Table 1 for variables definitions.

Each value in this table represents Pearson product moment correlation
coefficient between each pair of the variables listed in column 1.
Stands for 10%, 5%, and 1% significance levels respectively.

Table 4
Ownership Structure and Earnings Management
Model 1: EM it 1 2 INSI it 3Contit it

Model 2: EM it 1 2 INSTit 3Contit it

Model 3: EM it 1 2 EBH it 3Contit it
Model 4: EM it 1 2 INSI it 3 EBH it 4 INSTit 5Contit it
Model 5: EM it 1 2 INSI it * SIZEit 3Cont it it

Model

Intercept
L1
INSI

(1)

(2)

(3)

(4)

(5)

-0.249**
(0.124)

-1.491**
(0.724)

-1.587**
(0.748)

-0.441**
(0.146)

-0.473
(0.442)

-.320***
(0.021)

-.245***
(0.068)

-0.247 *** -.331

(0.063)
(0.018)

.0554**
(0.025)

EBH

-0.346***
(0.023)

0.144*** 1.664**
(0.045)
(0.754)
-0.046
(0.122)

INST

-0.003
(0.028)

-0.183
(0.124)

-0.001
(0.145)

0.041
(0.03)

0.004
(0.048)

SIZE

0.017**
(0.008)

0.090**
(0.044)

0.095**
(0.044)

0.023*** 0.029**
(0.008)
(0.029)

LEV

0.007
(0.030)

0.078
(0.100)

0.089
(0.982)

0.023
(0.025)

0.084***
(0.026)

ROE

0.001***

0.000

0.0002

0.001*

0.002***

GROW

(0.000)

(0.001)

(0.001)

(0.000)

(0.000)

-0.006
(0.006)

0.018
(0.111)

0.0172
(0.012)

-0.008
(0.005)

0.003
(0.009)

INSI*SIZE
Autocorrelation(1
)
Autocorrelation(2
)
SarganTest (df)
Wald (df)

-3.4964***

-3.3244***

-3.375***

-1.2395

1.160

-1.096

0.102**
(0.047)
-3.042***

2.874***
-1.212
-1.706

7.094(5)
7.792(5)*
8.792(5)
8.753(5)
24.87(6)*** 26.160(6)*** 26.60(6)*** 27.81
(8)***

7.434(5)
39.74(9)***

The dependent variable Earnings Management (EM) is measured by

Discretionary Accruals (DACC). DINSI is the insider ownership measured as
percentage of shares owned by board of directors their wives and children and
influential executives. EBH is the external block holders measured as the sum of
shares that exceeds 5% for every individual share holder. INST is the
institutional block holder measured as the sum of shares that exceeds 5% for
every institutional share holder. SIZE is the size of the firm approximated by the
natural logarithm of total assets. GROW is the growth of the company
approximated by percentage change in sales. LEV is the leverage ratio calculated
by total liabilities over total assets. In all the reported Models DACC is regressed
on the aforementioned independent variables.
Models 1 to 3 each of the ownership measures are included individually
in addition to the control variables. In Model 4 the entire ownership structure
variables are included at ones. In Model 5 the interaction effect of size and the
portion of insider ownership are examined wither the relation between earnings
management and insiders differ among different firms size. All models are
examined using GMM estimation. Four test statistics are reported: (1) and (2)
first and second order autocorrelation of residuals respectively, which are
asymptotically distributed as standard normal N (0, 1) under the null of no serial
correlation. Wald is the Wald test of joint significance of the estimated

coefficients which is asymptotically distributed as Chi-square under the null of

no

relationship.

Sargan

test

of

overidentifying

restrictions

which

is

asymptotically distributed as chi-square under the null of instruments validity.

All estimations were carried out using the Stata program. ***,**, and * indicate
coefficient is significant at the 1, 5, 10% levels, respectively.