Corporate ownership, control and the informativeness of disclosed earnings in Russian listed firms

Abstract

Many problems of corporate governance in Russia are beyond the scope of classical agency theory because of highly concentrated ownership structures. Using ownership and financial dataset from UBS Brunswick, we show that the use of accrual based accounting in Russia has resulted in lower in formativeness of earnings. Opportunistic earnings management hypothesis holds where majority shareholders (controllers) enjoy short-term benefits of manipulating accounting. Interestingly, the returns (net of market) increase when use of discretionary accruals to manage earnings increases in firms controlled by either state or oligarchs. However, such relationship does not exist when ownership is accumulated without control. We also found that state-owned companies use less discretionary accruals than other control groups. We do not find any evidence supporting performance measure hypothesis where firms manage earnings by discretionary accruals to offset the over or under reaction of economic shock. Highly leveraged firms tend to have positive relationship between earnings management and returns, whereas, both size and growth reflect negative informativeness of earnings. The results describe the concentrated ownership structure in Russia where controlling owners not only, achieve personal targets by over or under-statement of disclosed earnings but also get positive response from the market. This market benefit however, can only be achieved with effective control.