The effects of firms' ownership structure on the informativeness of earnings : Hong Kong evidence

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The effects of firms' ownership structure on the informativeness of earnings : Hong Kong evidence

 

Author: Lai, Wai-ching Phoebe
Title: The effects of firms' ownership structure on the informativeness of earnings : Hong Kong evidence
Degree: M.Sc.
Year: 1999
Subject: Business enterprises -- China -- Hong Kong
Industrial management -- China -- Hong Kong
Managerial accounting -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Dept. of Accountancy
Pages: vi, [189] leaves ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1477348
URI: http://theses.lib.polyu.edu.hk/handle/200/929
Abstract: This study examines the relationships between firms' ownership structure and informativeness of earnings and managers' earnings management behavior. The basis of explanation of these relationship are drawn from the theory of the firm and the agency theory. Modern theory of finance assumes market participants are rational, they behave in a way that their personal wealth are maximize. When the interest of managers, who operating the firm, highly diverge with owners, manager's motivation toward opportunism arise. As a result, firm value is not maximized. To ensure the manager to work toward firm value maximizing, contractual constraints are set against firm performance, however, all these tie to accounting earnings or stock price. Managers are motivated to manipulate reported earnings by selection of accounting techniques in the available latitude in order to satisfy the contractual constraints, and at the same time, maximizing their wealth and secure their job. In turn, the accounting earnings are not necessarily reflecting the economic substance of underlying transactions, accounting earnings become less informative. However, when the level of managerial ownership increase, the alignment of interests between managers and owners leads to a reduction of managers' opportunistic behavior. Earnings' informativeness increase. When the level of managerial ownership increase to a certain high level, the managers have enough voting power to guarantee their jobs, they may opt for non-value maximization behavior. Resulted in the reduce in informativeness of earnings. The discretionary accruals serves as a measure of managers' accounting choice, are predictably related to the managerial ownership. The result of this study confirms the signaling effect of earnings and accounting accruals. In addition to managerial ownership, some other determinants of earnings' informativeness are investigated in this research. Namely, firms' regulatory setting, systematic risk, firm size, leverage and earnings' variability. The results evidence the robustness of managerial ownership in explaining the earnings' explanatory power to returns even by inclusion of these factors. Industrial differences in the relationship between managerial ownership and earnings' informativeness are separately tested in this study. The results support that industries required large Capital investments and in large size subject to more intensive scrutiny, the earnings informativeness are higher.

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