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Private Control Benefits and Earnings Management: Evidence from Insider Controlled Firms
Author(s) -
GOPALAN RADHAKRISHNAN,
JAYARAMAN SUDARSHAN
Publication year - 2012
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2011.00431.x
Subject(s) - earnings management , insider , business , monetary economics , earnings , investor protection , cash flow , control (management) , insider trading , consumption (sociology) , accounting , economics , finance , corporate governance , social science , management , sociology , political science , law
We examine earnings management practices of insider controlled firms across 22 countries to shed light on the link between consumption of private benefits and earnings management. Insider controlled firms are associated with more earnings management than noninsider controlled firms in weak investor protection countries. Consistent with the private benefits motive, insider controlled firms with greater divergence between cash‐flow rights and control rights are associated with more earnings management in these countries. Growth opportunities attenuate the association between insider control and earnings management even in weak investor protection countries. We also find some weak evidence that insider controlled firms are associated with less earnings management in strong investor protection countries. Overall, our results highlight a strong link between private benefits consumption and earnings management.