THE MONITORING ROLE OF THE EXTERNAL OWNERSHIP AND DISCRETIONARY ACCRUALS

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Abstract

Prior studies have focused on the role that the institutional investors play to control managerial behaviours as one of the factors of the external ownership in the developed countries specifically. Nevertheless, scant attention has given to the external ownership role whether the institutional or the foreign investors to maintain the minority shareholder interest especially with the presence of the central agency problem in the emerging markets such as Jordan. Thus, this study argued the monitoring role of the external ownership factors can minimize the managerial opportunistic behaviours through examining the relationship between external ownership factors and earnings management. Earnings management proxies using the performance-adjusted discretionary accruals model (Kothari et al. 2005 model) by applying the cross-sectional method to determine model parameters for each industry in each year. In order to achieve objectives of this research a sample of 798 firm-observation of the Jordanian non-financial firms listed in ASE during the period 2009-2015 were collected. The random-effect GLS regression model is used after following the correct procedures of the panel data analysis to determine the appropriate model as stated by the results of Hausman and LM tests. Hence, the correcting robust standard errors estimates method was used since the data was suffered from the heteroscedasticity problem. The results show that the institutional ownership in Jordan plays a vital role in mitigating the opportunistic behaviours of managers. Likewise, the existence of foreign ownership in firms minimizes the level of earnings management practices. These support the hypotheses that the institutional and foreign investors are able to control the managers of the firm. Also, provide evidence about the similarities between the role of the foreign investors and the role of institutional investors since there is a shortage of the evidence about foreign investors role especially with earnings management.

Keywords: Earnings management (discretionary accruals), Institutional Ownership, Foreign Ownership, Amman stock exchange (ASE)

JEL Classification:G32, G34,M41

Date received: 11 November 2016

Date accepted: 19 January 2017

How to cite this paper: Mosa Ghazalat, A., Islam, M. A., & Mohd Noor, I. (2017). The monitoring role of the external ownership and discretionary accruals. Corporate Ownership & Control, 14(2-1), 181-192. https://doi.org/10.22495/cocv14i2c1p4