The Effect of Major Shareholder Ownership on the Relationship between Earnings Management and Firm Value. The effect of foreign investor ownership on the relationship between earnings management and firm value. It will also analyze the impact of corporate governance on the relationship between earnings management and firm value.
Firm Value
The previous studies on the relationship between firms' risk aversion and firm value have provided mixed predictions. Park and Lee (2017) investigated the effect of multiple directorships on firm value through an analysis of the number and ratio of deputy directors among registered directors.
Corporate Governance
The analysis showed that in the case of “overconfident companies,” chasing risks lowers business value. Giroud and Mueller (2011), assuming that the market is inefficient, argued that firms with non-competitive and healthy governance structures enjoy higher firm value. On the contrary, companies with competitive and weak governance structures exhibit lower stock returns; poor sales performance; and low business value.
Sohn (2010) analyzed whether there is a cause-and-effect relationship between corporate governance and firm value. Through a regression analysis, he reconfirmed that the level of corporate governance structure has a statistically significant effect on firm value - as found by Drobetz et al. He added that especially the analysis using the lower governance index showed that there is a close positive relationship between firm value (Tobin's Q) and the governance index of the board, the audit organization and the disclosure sector.
Using the agency theory framework, Kang et al. 2015) investigated the relationship between board independence and the level and efficient allocation of cash assets in order to analyze how corporate governance affects firm value. They added that only when information asymmetry is low, good governance structure increases firm value.
Hypothesis
They found that capital costs fall only when information asymmetry is low, as investors fully recognize the governance structure. Although such earnings management is a common discretionary authority accepted by corporate accounting standards, the problem is that stakeholders such as investors do not fully recognize this discretionary authority of firms over the net income ratio. Consequently, firms' profits may increase in the short term through earnings management, but in the long term, such a management practice will reduce the reliability and usefulness of accounting information, causing an increase in capital costs, thereby reducing value. of the firm.
In analyzing the internal structure of corporate governance (separated from the external structure of corporate governance), it can be concluded that agency cost will be reduced when the holdings of the largest shareholder; the board of directors and the CEO increase, as ownership becomes stronger in terms of the principal-agent problem. However, the question remains whether such a monitoring effect can reduce the negative impact of earnings management on firm value. To summarize previous studies on corporate governance, by improving the ownership structure, it reduces the agency problem and encourages managers to make appropriate decisions, which will ultimately lead to an increase in firm value.
H 2] the higher the level of corporate governance, the more positive impact it will have on the relationship between earnings management and firm value. In other words, it aims to confirm whether investors can recognize a good corporate governance structure and whether the company's value increases as a result.
Research Design
Sample Selection and Data
The definition and measurement of the variables used in this research are presented in
below. lt; Table 1> Definition of variables Firma. WEDi,t-1: prior control-ownership inequality. holdings of subsidiaries, directors and non-profit corporation) WED>40%i,t-1. For the variables implying earnings management, MJDA and PMDA, the mean was –0.005 and –0.001 respectively, which showed a negative value close to 0.
Furthermore, the corporate governance variables are ownership structure using stakes which averaged 0.397 for the largest shareholder stakes (LAR); The results show that the stakes of foreign investors and CEOs were not comparably high and imply that improving corporate governance is a task that still needs work. Second, continuous variables representing corporate governance structure (LAR, BRD, CEO) showed a negative (-) correlation with firm value and a positive (+) correlation with earnings management.
These results from the correlation analysis are against the hypothesis of this study and previous research on corporate governance and firm value. Since such correlation figures represent only simple correlation between variables, the rest of this study will analyze the relationship in detail through regression analysis that includes relevant control variables. lt;Table 3> Pearson and Spearman correlation matrix.
Earnings Management Variable
To obtain robust statistical results, we use the Adjusted-Jones model presented by Dechow et al. 1995), which is widely used in several studies as a measure of earnings management, as well as as performance-based discretionary accruals measures (Kothari et al. 2005) . The Adjusted-Jones model (Dechow et al. 1995) provides a revised version of the Jones model (1991), which reduces the measurement error in the previous model, which did not view sales as a means of earnings management. In addition, it includes a variable that subtracts changes in accounts receivable deductions from the change in income when measuring discretionary accruals.
Furthermore, the Performance-matched discretionary accruals measure (Kothari et al. 2005) is a model that takes into account total return on assets, which continues to be used today as a primary measure of earnings management. Formula 3 below describes the total accruals calculated by Dechow et al. 1995) via the Jones model, which is standardized as the previous year's total assets to account for different company sizes. Also, as can be seen from Formula 4, it can be deduced that the remaining term, which deducts non-discretionary accrual from the total accrual, can be regarded as discretionary accrual.
???? Adjusted-Jones model discretionary accrual in year t 𝑃𝑃𝑀𝑀𝑀𝑀𝑇𝑇𝑖𝑖,𝑡𝑡= firm i's performance-based discretionary accrual in year T. 𝑃𝑃𝑃𝑃𝑆𝑆𝑖𝑖,𝑡𝑡= the fixed assets of company i in year t (excluding land and assets under construction) 𝐴𝐴𝑅𝑅𝑇𝑇𝑖𝑖,𝑡𝑡= the total return on assets of company i in year t.
Research Model
Vi,t is the dependent variable used in this model, which represents the fixed value of company i in year t. As in several previous studies, Tobin's Q and M/B ratios are used as a proxy variable for firm value. Tobin's Q refers to the enterprise value based on the market value of assets and replacement costs, and is a proxy that measures the current business.
In general, since it is impossible to measure replacement costs directly, the book value of assets is used as its proxy (Chung and Pruitt 1994; Kim and Kwon 2018). CGi,t-1 is a dummy variable that takes a value of 1 when the largest shareholder's share (LAR) is 50% or more; when the board of directors'. The critical value of each variable reflects the reality where the average properties of each agent are different.
In addition, to control various factors that may influence firm value as outlined in previous studies, the study will include the following financial control variables: natural logarithm value of total assets; debt ratio to control a possible effect of corporate capital structure on corporate value (such as leverage); an average of sales growth over the past three years to control for the effect of business growth; ROA and total asset-to-operation cash flow to manage the effect of profitability; current ratio because it reflects solvency and credit capacity that can affect company value; and natural logarithm value of firm age to control the effect of growth stage and maturity. In addition, other dummy variables are included in this model to further control for various factors that can influence company value:
Empirical Results
This implies that the higher the share of shareholders, the greater its impact in mitigating the negative relationship between earnings management and firm value. The effect of the largest shareholders' stake on the relationship between earnings management and firm value. To confirm hypothesis 2, the subsequent study involved corporate governance structure and earnings management interaction term (AEM × FOR) with MJDA chosen as the earnings management (AEM) variable.
For the purpose of verifying Hypothesis 1, the regression analysis of firm value variable, TQ and MB, using MJDA as earnings management variable (AEM), produced results where the coefficients of AEM variables show the negative(-) value of –0.335 have and - 0.657, respectively, statistically significant at least at 1%. Further analysis using PMDA as earnings management (AEM) variable showed the regression coefficient of AEM variable with a value of –0.377 and -0.786 respectively, which also showed a negative relationship at 1%. The subsequent analysis using PMDA as earnings management (AEM) variable also demonstrated a negative (-) relationship at 1% with regression coefficient of AEM variable value of -0.365 and -0.736, respectively.
To confirm Hypothesis 2, the subsequent study included corporate governance structure and the earnings management interaction term (AEM × CEO), with MJDA selected as the earnings management variable (AEM). However, they still statistically show that an increase in CEO ownership has an impact on mitigating the negative relationship between earnings management and firm value.
CONCLUSION
Nevertheless, recognizing the need for an in-depth analysis that takes into account ownership-control inequality, this article also addresses ownership-control inequality (the ownership of subsidiaries, executives and non-profit corporations) and the effect of it on the relationship between earnings management and fixed value in the appendix section. If the ownership-control disparity is large, controlling shareholders will be more likely to pursue opportunistic interests to maximize their wealth and to make decisions that conflict with corporate value. This implies that there may be a difference in decision-making process depending on the ownership-control inequality characterized by the difference between the cash flow right and the voting right of controlling shareholders.
The discussion in this appendix section aims to take the regression analysis results involving the largest shareholders' equity variable one step further and provide insight into how the inequality of ownership and control affects firm value. below used in Lee et al. 2012), the analysis involved calculating the difference between ownership and control by subtracting the cash flow right from the voting right. This may suggest that the greater the difference between ownership and control, the worse the agency problem; it lacks impact on firm value to mitigate the negative effect of earnings management on firm value. 47 . the internal governance structure has been shown to have a positive effect on the negative relationship between earnings management and firm value, as agents that generate ownership–control inequality can also be seen as internal corporate governance.
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The effect of inequality between ownership and control on the relationship between earnings management and firm value. How does good corporate governance contribute to a company's value?: Independence of the company's board and cash positions.
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