Director blockholders and earnings management

Date

2020-08

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Abstract

I empirically analyze the impact that director blockholders have on earnings management driven by CEO incentives. I provide evidence that the presence of blockholders on the board of directors lowers the amount of abnormal working capital accruals which can be expected from CEO incentives. I then show that this is primarily done through lowering abnormal increases in inventory. This finding is strongest among busy boards, providing evidence that director blockholders can provide strong corporate governance in the absence of an attentive board of directors. Further tests suggest that director blockholders can positively influence a company due to specialized knowledge of how the firm operates and that the results are not driven by the existence of family firms.

I empirically analyze the impact that director blockholders have on earnings management through the use of Benford’s Law. I provide evidence that blockholders who sit on the board of directors lessen the amount of earnings management associated with rounding earnings. I then show that this is likely a function of directors intensifying their monitoring when they have large shares of equity. Finally, I show that director blockholders may to be able to prevent firms from misrepresenting the value of their inventory.

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Keywords

Earnings management, Blockholders, Inventory, Benford's law

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