Ownership structure and financial reporting quality: Moderating role of regulation

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Abstract

This study examines how ownership structure (OS) affects the financial reporting quality (FRQ) of listed firms in India. It also investigates whether the interaction of firm-level governance (business group) and country-level governance (Companies Act, 2013) yields optimal outcomes. This study examines FRQ measured using accruals and real earnings management (AEM and REM). Higher earnings management lowers FRQ and vice-versa. Firms affiliated with business groups are likelier to choose real over accruals earnings management. They trade off accruals and real earnings management to expropriate minority shareholders. This pattern reverses after a change in regulation. Thus, stringent regulations may lower FRQ (suboptimal outcomes). High-promoter holding firms have lower accruals quality, while high-institutional holding firms use discretionary expenses to manage earnings.

Keywords: Business Groups, Earnings Management, Financial Reporting Quality, Ownership Structure, Regulation

Authors’ individual contribution: Conceptualization — P.R. and P.R.R.; Methodology — P.R. and P.R.R.; Validation — P.R. and P.R.R.; Formal Analysis — P.R. and P.R.R.; Investigation — P.R. and P.R.R.; Resources — P.R. and P.R.R.; Data Curation — P.R. and P.R.R.; Writing — Original Draft — P.R. and P.R.R.; Writing — Review & Editing — P.R. and P.R.R.; Supervision — P.R. and P.R.R.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M4, G32, G34, G38, K2

Received: 29.02.2024
Accepted: 03.06.2024
Published online: 05.06.2024

How to cite this paper: Rajpurohit, P., & Rijwani, P. G. (2024). Ownership structure and financial reporting quality: Moderating role of regulation. Corporate Ownership & Control, 21(2), 178–189. https://doi.org/10.22495/cocv21i2art14