The purpose of this paper is to investigate the relation between the value of executive director share ownership and discretionary accruals.
This study uses a dataset of 1,173 firm‐year observations drawn from 188 Australian listed companies for the period 2000‐2006. The analysis is based on multivariate regression analysis and ordinary least square models were used to investigate the relation between the value of managerial ownership and discretionary accruals. The issue of potential endogeneity is addressed by using a simultaneous equation system.
A negative relation is found between value of managerial share ownership and discretionary accruals at lower levels of value of ownership, which is consistent with the theorised incentive alignment that as the managers commit more resources to their firms, stakeholders impose less contractual constraints specified in terms of accounting numbers and managers make lower accrual adjustments. After a certain level of value of ownership is attained, a positive relations seen, consistent with increased discretionary accrual adjustments associated with stakeholders anticipating managerial entrenchment. Also, it is found that these results are driven by firms with income increasing, as opposed to income decreasing, discretionary accruals.
Shares and options are forming an increasing proportion of executive remuneration that continues to be the subject of much debate amongst regulators and in the media. Showing that the value of share ownership may be an effective internal governance mechanism to help align incentives adds to the debate and has policy implications.
The paper's primary contribution is finding that the value (as opposed to proportion) of share ownership, typically representing a sizeable proportion of managers' undiversified wealth, is a potentially direct driver of theorised incentive alignment and entrenchment effects associated with share ownership.
Khan, A. and Mather, P. (2013), "The value of executive director share ownership and discretionary accruals", Accounting Research Journal, Vol. 26 No. 1, pp. 35-55. https://doi.org/10.1108/ARJ-02-2012-0011Download as .RIS
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