Insider Ownership and Real Earnings Management in Indian Companies

Abstract

The present study aims to examine, and to test the monitoring effect of institutional investment on, the relationship between insider ownership and real earnings management in Indian companies. The study examines the non-linear association between insider ownership and real earnings management using a sample of listed non-financial companies in the Indian market from 2011 to 2018. The study used pooled data OLS regression and Quantile regression. The findings reveal significant non-linear U-shaped relationship between insider ownership and real earnings management and that the large-size institutional investment makes such non-linear relationship insignificant. Contribution of the present study to the literature is two-fold. First, it proves the differential impact of the size of insider ownership on real earnings management. It indicates that firms having large-size insider ownership have greater scope for real earnings management, underscoring the need for the more scrutiny of reported earnings by the outsider shareholders. Second, it proves significant positive effect of the size of institutional investment in constraining the entrenchment by the insider owners. It signals that firms with large-size institutional investment have better quality of financial reporting and also contribute to efficient price discovery in the capital markets.