The relationship of earnings management with ownership concentration and board structure: A study of publicly-listed firms for the years 2002-2007

We investigate the effect of internal corporate governance mechanisms, such as ownership concentration and board structure, on earnings management on non-financial publicly-listed firms, for the years 2001-2007. We find evidence that ownership concentration as measured by largest share holding, and by an ownership concentration dummy, decreases earnings management, which may mean that there is efficiency in the management of a company given a large ownership concentration. Moreover, we find evidence that a larger board structure decreases earnings management because of the expertise a larger board can bring. However, a greater ratio of independent directors also decreases earnings management, because independent directors act in the interest of stockholders. Overall, we conclude that despite the negative effect of internal corporate governance mechanisms on earnings management, there is still room for improvement in the implementation of certain regulations of the Securities and Exchange Commission, since we find that some firms do not comply with all the regulations in the Corporate Governance Code.