The impact of pyramid ownership on earnings management

Abstract

PurposeUnlike firms listed in the USA, many large firms in Canada belong to business groups organized as pyramids. A pyramidal structure refers to a business group that consists of a set of enterprises or other entities and displays a top-down chain of control. The purpose of this paper is to investigate the relationship between pyramid ownership and earnings management.Design/methodology/approachThe paper is an empirical study using a sample of 165 Canadian listed firms from 2010 to 2015. The impact of pyramid ownership on both accrual-based and real earnings management is examined.FindingsThe findings show that pyramid-affiliated firms engage in less accrual-based and real earnings management than non-pyramid-affiliated firms. The results further show that the divergence between control rights and cash flow rights of the controlling shareholders in the pyramid-affiliated firms is positively related to real earnings management. Moreover, the results highlight that intra-group transactions (other than internal financing) among pyramid-affiliated firms lead to higher level of both accrual-based and real earnings management, but internal financing is negatively associated with real earnings management. Overall, this study provides the evidence which indicates that pyramid ownership structure and earnings management are related to each other.Originality/valueThe paper contributes to the earnings management literature by studying the impact of pyramid ownership structure on earnings management, especially real earnings management.