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International Journal of Accounting & Information Management
Ownership structure and earnings management: evidence from Jordan

Ebraheem Saleem Salem Alzoubi,
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Ownership structure and Ownership

structure and
earnings management: evidence earnings
management
from Jordan
Ebraheem Saleem Salem Alzoubi 135
School of Accountancy, College of Business,
Received 1 June 2015
Universiti Utara Malaysia, Sintok, Malaysia Revised 6 August 2015
Accepted 18 August 2015
Abstract
Purpose – The purpose of this paper is to examine the association between internal corporate
governance mechanism and earnings management of Jordanian companies. More specifically, the
author examines several hypotheses regarding the relationships between ownership and earnings
management.
Design/methodology/approach – This study measures the magnitude of discretionary accruals as
a proxy for earnings management using the cross-sectional modified Jones model. A number of
econometric techniques are used including ordinary least squares and generalized least squares to test
the relationship between company ownership and earnings management, using a sample of 62
companies listed on the Amman Stock Exchange.
Findings – The results revealed that insider managerial ownership, institutional ownership, external
blockholder, family ownership and foreign ownership have superior influence on financial reporting
quality, as it is, to a greater extent, potentially able to curtail earnings management. The findings
contended that the aspects of ownership structure have a significant influence on earnings
management, which is in agreement with the theories of corporate governance and opinions that have
been highlighted through a number of international bodies.
Research limitations/implications – Due to lack of data, the paper depends on cross-sectional data
applied to isolate abnormal accruals.
Practical implications – The evidence may be conceivably beneficial as a supporting fundamental
for regulatory action, particularly those that affect the ownership structure. The findings have
significant implications for regulators as well as supervisors, who will benefit by the comprehension of
how ownership structure affects earnings management and enhance financial reporting quality.
Originality/value – The current research produced its essential contribution through empirically
displaying that ownership structure has different implications on earnings management. Moreover, the
results recommended that both policymakers and researchers would no longer contemplate ownership
structure as a whole, given that ownership structure has different implications on earnings
management, measured by the discretionary accruals.
Keywords Ownership structure, Corporate governance, Financial reporting quality,
Earnings management
Paper type Research paper
International Journal of
Accounting and Information
Management
Vol. 24 No. 2, 2016
The author gratefully acknowledges the helpful comments and suggestions received from the two pp. 135-161
anonymous reviewers. Editor-in-Chief Maggie Liu provided excellent editorial support. All the © Emerald Group Publishing Limited
1834-7649
remaining errors are the sole responsibility of the author. DOI 10.1108/IJAIM-06-2015-0031
IJAIM 1. Introduction
24,2 In recent times, earnings management has been given substantial attention by
regulators and corporate stakeholders. Consistent with Healy and Wahlen (1999, p. 368):
[…] earnings management occurs when managers use judgment in financial reporting in
structuring transactions to alter financial reports to either mislead some stakeholders about
the underlying economic performance of the company or to influence contractual outcomes
136 that depend on reported accounting numbers.
Meanwhile, Ronen and Yaari (2008, p. 27) defined earnings management as “a collection
of managerial decisions that result in not reporting the true short-term,
value-maximising earnings as known to management”. The nature of accounting
accruals provides the management discretion in deciding the real earnings a company
records in any specified time. Asymmetric information permits the management to
manage earnings to maximise their personal benefits or to be indicative of their own

information, therefore affecting Financial Reporting Quality (FRQ) (Chung et al., 2004;
Gul et al., 2003; Liu and O’Farrell, 2011). As accounting figures, inclusive earnings are
utilised to decrease agency costs in the executive compensation setting, and motives for
earnings management can be debt covenants, bonus plans, meeting analyst’s
anticipations or elevated supplementary funds in convenient terms.
The concern and attention in corporate governance has developed exponentially
particularly with the pioneering company scandals, e.g. BCCI, Enron, Maxwell and
WorldCom, in the UK and USA. The necessity for powerful corporate governance had
been highlighted through numerous amendments and standards advanced at both the
international level and the country level, for example, the Combined Code in the UK,
Jordanian Corporate Governance Code (JCGC), the Organisation for Economic
Development (OECD) Code and the Sarbanes–Oxley Act in the USA.
Usually, researchers of corporate governance concentrated on developed countries
(Park and Shin, 2004; Peasnell et al., 2005; Wang, 2006). However, limited study has
occurred on the level to which the developed economies’ corporate governance matters
are relevant to that of emerging economies. A crucial motivation for examining the
emerging economies’ corporate governance, such as Jordan, is the important
development of emerging economies by companies being listed on the international
stock exchange. The growth has been in line with the drive from inside emerging
economies to invite further foreign direct investment through encouraging long-term
economic growth. Intrinsically, the concentration on foreign investment growth in
Jordan has required the support of transparent procedures in the company operations.
Furthermore, there is a need for effectual corporate governance assistance to achieve
high FRQ levels (Dimitropoulos and Asteriou, 2010; Gul et al., 2009; González and
García-Meca, 2014). La Porta et al. (2000) contended that emerging economies have
conventionally been reduced in financial markets due to their weakened corporate
governance. As a result, an examination of the ownership structure aspects as a
significant driver in governance can produce insights to corporate governance
development in an emerging economy, such as that of Jordan.
Jordan is a good study subject to examine for the effectiveness of ownership
structure, as it has displayed immediate concerns in enhancing the pillars of corporate
governance to improve FRQ. Moreover, unlike some of the other developed countries,
Jordan is characterised by high ownership concentration. This clarifies why ownership
structure is the predominant mechanism of control in Jordan. Due to its small capital Ownership
market, Jordan depends significantly on foreign capital. Furthermore, a less liquid and structure and
small market produces more risk to foreign investors. Its geographic seclusion makes it
a high probability for information asymmetry, as well as rising agency costs for
earnings
investors. Finally, in Jordan, higher management-ownership companies provide the management
management chances to sequester minority stockholders.
This study particularly examined corporate governance aspects in Jordan associated 137
with the ownership-earnings management relationship. In an endeavour to fill the
research void emphasised by Bushman and Smith (2001), this research extends the
literature of corporate governance through investigating the relationship between
ownership structure and earnings management in Jordan. There are a number of
motives that sparked and drove this research. First, I extend and complement the limited
literature on ownership structure in Jordan (Al-Fayoumi et al., 2010; Abed et al., 2012).
Second, this study selected the period after the Shamayleh Gate crisis (2003), as it had
created the need to consolidate the foundations and principles of corporate governance
in the Jordanian economy. Third, the main purpose of Reports on the Observance of
Standards and Codes (ROSC) was to enforce the mechanisms needed to improve FRQ in
Jordan (ROSC, 2005). The recommendations by the Amman Stock Exchange (ASE) to
meet the challenges of corporate governance that will be facing the kingdom are
expected to improve its chances for growth as well as materialised investment (ASE,
2007). Demsetz and Villalonga (2001) confirmed that a country needs to treat ownership
structure appropriately and calculate for the difficulty of interests constituted in a
specified ownership structure, where diverse dimensions of ownership structures
should be deliberated. Finally, despite the fact that several studies examined earnings
management in the US setting (Ronen and Yaari, 2008), Leuz et al. (2003) recommended
that earnings management practices vary through countries. Therefore, supplementary
international evidence can beneficially contribute towards describing these differences.
This study used a sample of Jordanian listed companies during the period from 2006
to 2013. The results suggested that the aspects of ownership structure (excluding
outsider managerial ownership) are effective monitors, which results in lower earnings
management and, therefore, higher FRQ. The results contended that ownership
structure characteristics have an important influence on earnings management, in line
with previously published research evidence and several hypotheses. Because the
principal agency conflict in numerous countries concentrates on the wealth
expropriation of minority shareholders through shareholder monitoring, the
investigation of ownership structure effect on earnings management emphasises a
precedent research question. This study result further supported the monitoring
function significance of ownership structure. This research produced its essential
contribution through empirically displaying the influence made through ownership
structure on earnings management shall vary relying on the aspect of ownership
structure. This evidence might be possibly beneficial in providing a foundation for
regulatory activities targeted at affecting the structure of ownership.
This research was constructed on previous studies in a number of ways. First,
different from most current research which frequently studies just one, two or even three
aspects of ownership, this research concentrated on six dimensions, namely, insider
managerial ownership, outsider managerial ownership, institutional ownership,
external blockholder, family ownership and foreign ownership. Second, while studies
IJAIM were deployed in the USA and UK settings to examine if ownership structure limits
24,2 earnings management, to the author’s knowledge, there has been no comprehensive
research among Jordanians investigating this matter. The ownership structure in the
UK and USA companies is extensively prevalent, while the ownership structure in
Jordanian companies is highly concentrated. This characteristic may affect the activities
of earnings management, as high ownership concentration leads to the agency problem.
138 Third, against most of earnings management research that investigated the major
incentives to manage earnings, this paper directly presents the ownership structure
effects on earnings management magnitude. Moreover, this study considered other
corporate governance mechanisms in the research model. Finally, as there is evidence
which suggests that there are particular factors of a country that can influence corporate
governance associations (Guest, 2008), this research explored a chance to investigate if
factors conventionally related to Western economy corporate governance hold true for
the Jordanian market.
2. Literature review and hypotheses development

Agency theory suggested that ownership and control separation causes a convergence
in the search for owners’ interests as opposed to managerial interests (Jensen and
Meckling, 1976), and consequently, monitoring management resolutions start to be
crucial in ensuring that interests of shareholders are safeguarded, and to assure
complete and reliable financial reporting. Corporate governance produces a number of
restraints to diminish the agency costs, which arise from the contract relationship
within a company or a framework to ensure that company finance suppliers attain their
investment return (Shleifer and Vishny, 1997). In terms of financial reporting, the
corporate governance role is to confirm acquiescence by the financial accounting
system, as well as to uphold financial statement credibility (Cohen et al., 2004).
Therefore, completely structured mechanisms of corporate governance would
predictably decrease earnings management, as they produce active management
monitoring, particularly in the process of financial reporting. Firm ownership structure
is deemed a significant monitoring mechanism for managers; hence, it may possibly
have a monitoring role in curtailing earnings management activities.
2.1 Managerial ownership

Agency theory proposed that as soon as managers do not own a firm, they manage or
they own a small amount of stock in that firm, their conduct is influenced through
self-interest which moves away from the objectives of enhancing company worth and
consequently from shareholders’ interest, all of which eases earnings management
activities (Fama, 1980; Fama and Jensen, 1983; Jensen and Meckling, 1976). More to the
point, if managers own a particular portion of their fortune in the form of firm stocks
which they direct, or their private fortune directly relies on the interpreted resolutions,
then they would be more inclined to progressively align their interests with those of the
shareholders (convergence interests hypothesis), as well as display lower discretionary
accruals (Hashim, 2009; Jung and Kwon, 2002). Accordingly, insider ownership may be
perceived as a mechanism to limit the managerial opportunism behaviour; therefore, the
extent of earnings management is anticipated to be significantly negatively associated
with insider ownership (Klein, 2002; Sánchez-Ballesta and García-Meca, 2007; Teshima
and Shuto, 2008; Warfield et al., 1995).
On the other hand, non-moderate insider ownership can correspondingly have a Ownership
reverse influence on the firm, as the greater manager’s power may lead them to opt for structure and
accounting decisions which reverberate personal motives (entrenchment hypothesis),
hence, influencing the objective of maximising firm value (Jung and Kwon, 2002; Morck
earnings
et al., 1988). In this sense, the findings of the previous research showed that higher management
internal ownership leads to the management of earnings to make the most of personal
wealth (Gul et al., 2003; Peasnell et al., 2005). Contrariwise, other research did not find 139
any significant relationship between the two variables (Habbash, 2010).
Thus, the debate that insider managerial ownership restrains managerial
opportunism interest leads to the proposal that a negative association exists among
stocks portion held by insiders and discretionary accruals. This study addressed this
through testing the following hypothesis:
H1. Insider managerial ownership is negatively associated with earnings

management.
Fama and Jensen (1983) and Shleifer and Vishny (1997) contended that higher outside
ownership assistance decreases agency conflicts, as they have superior incentive and
power to preclude expropriation through insiders. Beasley (1996) documented
significantly negative association between the probability of fraudulent financial
statement and outsider directors’ ownership. His results proposed that a high ownership
level held through outsider directors does assist in diminishing the possibility of
financial statement fraud. Moreover, Bhagat and Black (2002) showed that independent
directors are further active as soon as they are enthused through considerable
ownership. Because they found that independent directors who own substantial stocks
add value to the company, they recommended that policymakers should assert that
independent directors must own higher number of shares so as to enhance company
performance.
Because independent directors’ wealth is tied with the wealth of investors, Kang
(2008) advocated an affirmative involvement from independent directors who own
equity shares in the company. Hashim (2009) reported that outsider ownership is
significantly positively related to the quality of earnings. This result supports the
forecast of agency theory about the inducement alignment effect. As long as outsider
ownership rises, outsider director interests are more carefully aligned with company
owner interests, and therefore, provides more inclination to enhance earnings quality.
Consistent with this alignment effect, the study suggested a negative association
between outside managerial ownership and earnings management:
H2. Outsider managerial ownership is negatively associated with earnings
management.
2.2 Institutional ownership

Agency theory proposed that institutional investor monitoring can be a significant
mechanism of governance (efficient monitoring hypothesis). Institutional ownership
plays an effective role in monitoring management discretion and enhancing information
competence in capital markets, as institutional ownership is sophisticated, with benefits
in processing and acquiring information (Ferreira and Matos, 2008; Koh, 2003), hence,
restraining opportunism and reducing agency costs (Chung et al., 2002; Shleifer and
Vishny, 1997). In this matter, prior research suggested that the institutional investor role
IJAIM in companies may be estimated through the level of participation, for example, the
24,2 institutional ownership may perform like a governance mechanism which influences
earnings management relying on the participation level (Hadani et al., 2011; Hsu and
Koh, 2005; Siregar and Utama, 2008).
Institutional ownership may be unable to use their monitoring part and voting versus
managers, as it can impact their business associations with the company and they
140 concentrate on short-term financial results (Bushee, 2001). Thus, stress will be on
managers to meet short-term earnings anticipation. These influences specify that
investor ownership may not restrict manager discretion over earnings management,
and may influence management motives to be involved in earnings management (Agnes
Cheng and Reitenga, 2009; Charitou et al., 2007). However, other publications did not
display a significant relationship (Peasnell et al., 2005; González and García-Meca, 2014).
Chen and Rezaee (2012) included the largest shareholder percentage ownership as a
control variable when they examined the effect of corporate governance in International
Financial Reporting Standards convergence, and provided no significant relationship.
They also controlled for the percentage of institutional ownership when they tested
companies with higher internal governance scores while having higher convergence
scores, and found no significant association.
More precisely, lower-level participation by investors resembles short-term or
temporary views, but as soon as the participation level rises, institutional ownership is
realised by the investor to be greatly involved with the firm, and therefore, engage in
conflict resolution that may become apparent. Hence, the argument is that the greater
involvement by institutional investors should cause a positive influence on company
behaviour, as the managers should be disheartened to engage in earnings management
because of the emphasis by investor ownership to concentrate on the long term, which
proposed a negative association between institutional ownership and earnings
management, as follows:
H3. Institutional ownership is negatively associated with earnings management.
2.3 External blockholders

Small shareholders will not be concerned with monitoring, as they would have to
tolerate the costs of monitoring; thus, they only take part in a small portion of the welfare
(Zhong et al., 2007). Large shareholders play an important role in firms’ internal control,
as the participation extent would motivate them to influence and monitor the firm
strategy in which they have invested (Gabrielsen et al., 2002; Shleifer and Vishny, 1997;
Yeo et al., 2002). This indicated that larger shareholders should, consistent with the
hypothesis of efficient monitoring (Jensen and Meckling, 1976), lower opportunism
managerial behaviour and cause higher inclination to increase company value (Fama,
1980; Fama and Jensen, 1983; Shleifer and Vishny, 1997), having a positive effect on
FRQ, as maximising monitoring by shareholder participation decreases the motives by
the owners to expropriate minority shareholder wealth (Boubakri et al., 2005). In this
sense, evidence of prior studies emphasise that raised ownership is an active mechanism
of corporate governance in controlling management accounting decisions and results in
a higher FRQ (Klein, 2002; Wang, 2006). Yeo et al. (2002) reported that the monitoring
mechanism role played through external, distinct blockholders diminishes earnings
management activities.
On the other hand, as soon as the large shareholder level is excessively high, it may Ownership
cause agency problems because of the expropriation interest of minority shareholders structure and
(Boubakri et al., 2005). Large shareholders may practise their control rights to generate
special advantages, occasionally expropriating minority shareholders (hypothesis of
earnings
expropriation). Indeed, controlling shareholders can enforce their private predilections management
even though those penchants run against those of minority shareholders (Jensen and
Meckling, 1976; Shleifer and Vishny, 1997). Consequently, larger shareholders may get 141
involved in the company’s management and may cause managers to be involved in
earnings management to make best use of their private welfare (Habbash, 2010; Zhong
et al., 2007). However, some authors did not highlight any relationship (Peasnell et al.,
2005; Sharma and Kuang, 2014).
This research advocated the efficient monitoring hypothesis and proposed a negative
relationship between external blockholder ownership and earnings management, thus

the following hypothesis was proposed:
H4. External blockholder ownership (5 per cent or more) is negatively associated
with earnings management.
2.4 Family ownership

Family ownership companies should be further effective compared to the public
ownership companies as monitoring costs are less in family ownership companies
(Fama and Jensen, 1983). The entrenchment effect depends on the vindication, which
ownership concentration produces motives for monitoring shareholders to expropriate
other shareholder fortune (Fama and Jensen, 1983; Shleifer and Vishny, 1997). The
entrenchment effect, in turn, implicates that as controlling shareholders, family
members may take out particular advantages from the company at the minority
shareholders’ cost. Frequently, family members hold significant positions on board of
directors and management team. Hence, these companies may have ineffectual
monitoring through the board that lowers corporate governance. Moreover, the
entrenchment effect generates the likelihood of higher information asymmetry between
the other shareholder and familial ownership. Accordingly, family members have the
opportunity, as well as the incentive, to manage earnings for their own benefits. Thus,
the entrenchment effect forecasted that family ownership is related to inferior FRQ.
In this sense, Fan and Wong (2002) published inferior earnings response coefficients
for companies with higher ownership concentration in East Asian countries. This
evidence specified that superior family ownership produces more information
asymmetry that causes agency conflict, causes minority shareholders’ legal protection
to be weak and puts into effect the transparency of financial reporting to become lower.
Therefore, their findings strongly suggested that family ownership is related to lower
FRQ. Francis et al. (2005) indicated that company earnings with dual class equity
structures are informatively lower compared to earnings with a single class equity
structure. Companies with dual class equity structures have lower governance
mechanisms and therefore document inferior earnings quality. These results specified
the entrenchment effect of family ownership on quality of earnings, as dual class
companies are more inclined to have more concentrated ownership.
As soon as there are large shareholders in companies, there is a higher probability of
conflict of interest among these parties, as well as the minority shareholders. In family
companies, given their more asymmetric information, the probability of expropriated
IJAIM company resources is at an elevated level, caused by the entrenchment probability of
24,2 inexperienced team of family management. In line with this debate, San Martin-Reyna
and Durban-Encalada (2012) revealed that company leverage level and family
ownership describe the discretion degree that managers have for managing earnings.
Moreover, Castañeda (2007) reported that high family involvement causes a critical
effect on the firms’ control, where as soon as owners frequently distribute non-voting
142 stocks and create pyramidal structures of ownership to acquire funds, they would be
deprived of their capability to monitor the firm. Consistent with prior arguments, it may
be debated that the higher concentration of voting rights may involve superior
inducements for monitoring shareholders to acquire private advantages, therefore,
enhance earnings management activities.
Siregar and Utama (2008) specified that earnings management is more efficient
among family ownership companies compared to that in other companies. Prencipe et al.
(2008) indicated that to evade violation of debt contracts, family firms manipulate
earnings, even though they are lower disposed to be involved in earnings smoothing.
Yang (2010) showed that the higher the insider ownership level, the higher the extent of
earnings management, thus supportive of the entrenchment effect of family members.
The alignment effect relies on the view that both family member and other
shareholder interests are greatly aligned due to the considerable stock blocks held by
family members and their long-term existence. Consequently, consistent with the
alignment effect, family members have a lower likelihood to expropriate other
shareholder wealth throughout managing earnings. Because the founding family
wealth is closely tied with company value, families have strong inclination to control
employees (Anderson and Reeb, 2003). Furthermore, reputation protection and
long-term orientation prevents family companies from managing earnings, as earnings
management activities are characteristically short-term-oriented and could be
unexpectedly unfavourable to the long-term company execution. Sturdier monitoring
mechanisms of corporate governance are more perceived by the board of directors of
family companies (Anderson and Reeb, 2003). Successively, the sturdy monitoring
governance mechanism stimulates family members to interact supportively efficiently
throughout producing higher FRQ with other creditors and shareholders, thus
decreasing debt cost (Anderson et al., 2003).
In line with the alignment effect, family companies appear to execute effectively and
have sturdier corporate governance. Anderson and Reeb (2003) showed that family
companies are superior performers than non-family companies. Additionally, Anderson
et al. (2003) reported that family firms are related to inferior cost of debt. Even though
their results were not directly associated with earnings quality, they indicated a positive
association between corporate governance and family ownership. Wang (2006)
presented evidence that founding family ownership is significantly related to greater
quality of earnings (inferior abnormal accruals, higher earning informativeness and
lower persistence of transitory loss components in earnings). Ali et al. (2007) revealed
that, in contrast to non-family companies, family companies display lower positive
discretionary accruals, higher capability of earnings components to forecast cash flows
and higher earnings response coefficients.
Bona-Sánchez et al. (2011) exposed that family firms show greater quality of earnings
than non-family firms. Jaggi and Leung (2007) showed that audit committees’
effectiveness in controlling managerial conduct of earnings management is weakened
as soon as the company board is dominated by family members. Jiraporn and DaDalt Ownership
(2009) perceived that family ownership has lower likelihood to manage earnings. Jaggi structure and
et al. (2009) realised that family control and independent directors are replacements for earnings
monitoring earnings management.
On the other hand, González and García-Meca (2014) did not show any significant
management
relationship between discretionary accruals and family ownership. Consequently,
consistent with the alignment effect notion that a family firm lowers the probability to 143
seize affluence from other shareholders through manipulated earnings, this research
suggested a negative association between family ownership and the earnings
management, as follows:
H5. Family ownership is negatively associated with earnings management.
2.5 Foreign ownership

Foreign institutional investors are normally mutual funds or additional institutional
investors (Dahlquist and Robertsson, 2001). The knowledge spillover hypothesis
forecasted that higher knowledge by foreign institutional investors may restrain
earnings management. Grinblatt and Keloharju (2000) debated that foreign investors
should execute superiorly compared to domestic institutional investors, as foreign
ownership has been found to produce noteworthy economic benefits.
Hallward-Driemeier et al. (2006) perceived that companies with foreign ownership are
further creative compared to those deprived of foreign ownership. Gedajlovic and
Shapiro (2002) showed that the ownership structure is associated with company
profitability. Chung et al. (2004) indicated that foreign ownership is active in preventing
opportunistic managerial behaviour and decreases earnings management. Jiang and
Kim (2004) specified that foreign ownership is significantly related to earnings
timeliness. Guo et al. (2014) documented that companies with greater foreign ownership
are less involved in earnings management through cutting down discretionary
expenses. More recently, Ji et al. (2015) found no significant association between shares
owned by foreign investors and earnings quality.
The information asymmetry hypothesis foresees that the distance makes it difficult
for foreign institutional investors to control the company’s financial reporting process
and thus diminish earnings management. The trading performance of foreign investors
can be lower compared to that of domestic investors because of their information abuse.
For instance, Brennan and Cao (1997) highlighted those investors that have a tendency
to buy foreign assets as soon as the revenue on those assets is elevated and to sell as soon
as the revenue is low. Dvo[icirck]rák (2005) showed that domestic investors make more
profit than foreign institutional investors. Therefore, the remoteness makes it tough for
foreign investors to restrain earnings management.
The improved accounting knowledge and reinforced corporate governance
throughout foreign institutional investors will enable companies to oversee their
financial reporting systems and operating activities more efficiently. Hence, this
research anticipated that the superior knowledge of foreign institutional investors can
restrain earnings management and proposed the following hypothesis:
H6. Foreign ownership is negatively associated with earnings management.
IJAIM 3. Research design
24,2 3.1 Data and sample selection
The preliminary sample consisted of all industrial companies listed on the ASE at the
year’s end of 2013 (69 companies). The industrial sector is critical for economic
development. Hence, minimising the earnings management attributes is paramount to
improve FRQ. Financial sector companies were excluded from the analysis due to their
144 distinctive working capital structures (Davidson et al., 2005; Klein, 2002) as well as the
appended governance layer enforced throughout regulation. Data were collected
manually from the annual reports of companies listed on the ASE. These selected
companies were well-established companies and they were the foremost players in the
industrial sector. Those companies with missing governance mechanisms or financial
data were also excluded from the sample. After these exceptions were completed, the
sample for this research was restricted to 62 companies (six industry groups).
3.2 Measuring earnings management

Prior studies had developed a number of tests for earnings management. The current
research used discretionary accruals as a major proxy for earnings management.
Earnings management studies have been dominated by research that adhered to the
common framework of discretionary accruals, as suggested by McNichols and Wilson
(1988). This framework divides up accruals into discretionary and non-discretionary
components based on the presumption that high-level discretionary accruals would
suggest that a company is actually involved in earnings management activities. The
modified Jones model, as proposed by Dechow et al. (1995), is the furthermost regularly
applied method to decompose accruals and has been used previously by other studies
(Davidson et al., 2005; Klein, 2002; Peasnell et al., 2005). The model presumed that the
total accruals (non-discretionary constituent) are a utility of the revenue change,
modified for the receivables change, and the extent of property, plant and equipment
that drive depreciation charges, as well as working capital requirements.
The present study used the cross-sectional version of the modified Jones model.
Under this model, the level of discretionary accruals for a particular company was
calculated as the difference between the company’s total accruals and its
non-discretionary accruals (NDAC), as estimated with equation (1):
NDACijt ⫽ ␣=j (1/TAijt1 ) ⫹ ␤ˆ 1j(⌬REVijt – ⌬RECijt /TAijt1 ) ⫹ ␤ˆ 2j(PPEijt /TAijt⫺1 ) (1)
where ␣=j, ␤ˆ 1j and ␤ˆ 2j are industry-specific coefficients evaluated using the subsequent
cross-sectional regression[1]:
TACijt /TAijt1 ⫽ ␣j(1/TAijt1 ) ⫹ ␤1j(⌬REVijt /TAijt1 ) ⫹ ␤2j(PPEijt /TAijt1 ) ⫹ ␧ijt (2)
where TACijt ⫽ total accruals for company i in industry j in year t; ⌬REVijt ⫽ change in
revenue for company i in industry j between year t ⫺ 1 and t; PPEijt ⫽ gross property,
plant and equipment for company i in year t; TAijt ⴚ 1 ⫽ total assets for company i in
industry j at the end of the previous year, ⌬RECijt ⫽ the change in receivables for
company i in industry j between t ⫺ 1 and t[2].
Having evaluated NDAC from equation (1), the discretionary accruals (DAC) amount Ownership
for company i in industry j for year t was computed as the residual value from the structure and
following equation (3):
earnings
DACijt ⫽ TACijt ⫺ NDACijt (3) management
This research used the cash-flow method to evaluate total accruals because this method
was a contemplated ascendant to the balance sheet method (Hribar and Collins, 2002).
145
Total accruals (TAC) are defined as the differences between net income before extra
items (NI) and cash flow from operating activities (OCF) as stated below in equation (4):
TACijt ⫽ NIijt ⫺ OCFijt (4)

This study used the absolute value of DAC as a measure of the extent of earnings
management. This is in line with prior research on earnings management which
indicated that the quality of findings does not impose any sign or direction on the
earnings management anticipation (Chen et al., 2007; González and García-Meca, 2014;
Wang, 2006).
3.3 Control variables

So as to control for factors influencing earnings management that are not related to
ownership structure, this study included a number of control variables. Board
independence may have incentives to constrain earnings management by exercising
their monitoring role (Klein, 2002). Accordingly, previous research found that
independent directors in the board are effective in constraining earnings
management (Peasnell et al., 2005; Xie et al., 2003). Other studies did not find any
such association (Park and Shin, 2004). The board meetings’ number is a perfect
measure for the effort of directors’ monitoring. Therefore, it is conceivable that the
board of directors get further involved in their responsibilities and thus proceed
with a vigorous attitude towards improving the protection of FRQ; hence, a negative
relationship between earnings management and board’s activity was found in
previous studies (Xie et al., 2003). In contrast, other studies revealed no association
between earnings management and board meeting (Habbash, 2010). Board size may
influence functions of boards, and possibly company performance. The larger the
board member numbers, the more management monitoring activities. Prior studies
found that larger boards are related to inferior earnings management levels (Xie
et al., 2003).
Audit committee independence created active controlling of the financial preference
utilised through the management and assures financial statements credibility. Klein (2002),
Davidson et al. (2005) and Sharma and Kuang (2014) documented a negative relationship
between independent audit committee and earnings management. Conversely, Bedard et al.
(2004) showed no relationship between audit committee independent directors and
aggressive earnings management. Previous studies revealed that audit committees that
meet more regularly are related to higher FRQ (Abbott et al., 2004). Sharma and Kuang
(2014) did not show any relationship between the two variables. Superior talent and
resources of audit committee independent members will enable them to competently
perform their task in monitoring the process of financial reporting. Yang and Krishnan
(2005) showed significantly negative association between audit committee size and earnings
IJAIM management, suggesting that earnings management activity may be mitigated by the larger
24,2 sized audit committee. On the other hand, Davidson et al. (2005) and Xie et al. (2003) revealed
no association between the size of audit committee and earnings management. However,
Sharma and Kuang (2014) reported a positive relationship.
Firm size was used to control for the variances in the real behaviour of managers of small
and large companies. Despite the fact that certain researchers debated that larger companies
146 have supplementary steady earnings management (Dechow and Dichev, 2002), others
reported that the level of earnings management documented through larger companies is
consistently lower (Gul et al., 2009). However, large firms may have other motives to increase
earnings for gaining more advantages for their managers in facing further pressure to meet
or beat the analysts’ expectation (Chen et al., 2007; Dimitropoulos and Asteriou, 2010). Firm
growth is highly probable in affecting opportunistic behaviours. Hence, Dimitropoulos and
Asteriou (2010), Gul et al. (2009) and Sharma and Kuang (2014) highlighted a positive
association between firm growth and earnings management. Jaggi et al. (2009) reported a
negative relationship between these two variables, while González and García-Meca (2014)
found a positive relationship. Firm age was included to control for the variance in earnings
management of firms with different life cycles (Gul et al., 2009). Gul et al. (2009) displayed a
negative correlation, whereas Wang (2014) documented a positive relationship.
Return on assets was included as a proxy for profitability. Earlier studies proposed
that companies with lower profitability have higher earnings management activity
(Chen et al., 2007). Indeed, other research found that companies with higher profitability
are less engaged in earnings management (Bedard et al., 2004; Klein, 2002). Prior studies
recognised that managers of high-leverage companies have strong motives to use
income-increasing accruals to slacken the contractual debt restraints (Bedard et al.,
2004; Peasnell et al., 2005). Nonetheless, highly indebted companies may be less capable
of being involved in earnings management, as they are under close scrutiny by lenders
(Chung et al., 2002; Park and Shin, 2004). In addition, cash flow from operations was
include in the model to take into account the negative association between accruals and
cash flows, as documented in prior studies (Chen et al., 2007; Gul et al., 2009). However,
Peasnell et al. (2005) discovered a positive association between these variables. Prior
research suggested that Big 4 auditors are highly probable in detecting and
documenting irregularities and material errors in financial statements (Chi et al., 2011;
Sun et al., 2011). Moreover, companies audited through the Big 4 audit firms are liable to
have inferior level of XBRL (eXtensible Business Reporting Language) taxonomy
extension (Rao et al., 2013).
As the poor financial condition of the firm may give rise to agency costs as, well as
motivate the management to manage earnings, this research also included firm loss as a
control variable. Klein (2002) documented that negative income is associated with
independence of the audit committee. Bedard et al. (2004) and Beasley (1996) reported that it
is associated with financial misreporting. However, Sharma and Kuang (2014) and Wang
(2006) found no relationship between the two variables.
3.4 Regression model and variables definition

The following regression equation is embraced to examine the proposed hypotheses
between ownership structure and earnings management:
DAC ⫽ ␣ ⫹ ␤1INSOWN ⫹ ␤2OUTOWN ⫹ ␤3INSTOWN ⫹ ␤4EBH Ownership
⫹ ␤5FAMOWN ⫹ ␤6FOROWN ⫹ ␤7BRDIND ⫹ ␤8BRDMEET structure and
⫹ ␤9BRDSIZE ⫹ ␤10ACIND ⫹ ␤11ACMEET ⫹ ␤12ACSIZE earnings
(5) management
⫹ ␤13FRMSIZE ⫹ ␤14FRMGRTH ⫹ ␤15FRMAGE ⫹ ␤16ROA
⫹ ␤17LEV ⫹ ␤18CFO ⫹ ␤19BIG4 ⫹ ␤20LOSS ⫹ ␧i
147
The variables are as defined in Table I.
4. Empirical results and discussion

4.1 Descriptive statistics
Table II presents the mean value, minimum, maximum, median, standard deviation,
skewness and kurtosis of the variables. The results showed that the absolute value of
companies’ discretionary accruals have a small mean value of 9.3 per cent, while the
minimum value was closer to 0 (0.0001). As such, the result indicated that, on average,
Variables Acronym Definition
Discretionary accruals DAC Absolute value of discretionary accruals deliberated through the
modified Jones model
Insider managerial INSOWN Proportion of common stock owned by the insider board
ownership members (executive directors)
Outsider managerial OUTOWN Proportion of common stock owned by independent non-
ownership executive directors
Institutional ownership INSTOWN Proportion of common stock owned by institutional investors
External blockholder EBH Proportion (5 per cent or more) of common stock owned by the
individual blockholder
Family ownership FAMOWN Proportion of common stock owned by family members
Foreign ownership FOROWN Proportion of common stock owned by foreign investors
Board independence BRDIND Proportion of the proportion of independent non-executive
directors on the board
Board meetings BRDMEET Number of board meetings during a year
Board size BRDSIZE Total numbers of the board members
Audit committee ACIND Proportion of independent (non-executive) directors on the audit
independence committee
Audit committee ACMEET Total number of meetings held during the year
meetings
Audit committee size ACSIZE Total number of members on the audit committee
Firm size FRMSIZE Natural logarithm of total assets
Firm growth FRMGRTH The market-to-book ratio
Firm age FRMAGE The natural logarithm of the company’s listing years on the
ASE
Return on assets ROA Net income divided by total assets at the beginning of the period
Leverage LEV Ratio of debt to assets
Cash flow from CFO Cash flow from operations divided by total assets at the
operations beginning of the period
Audit quality BIG4 Dummy variable that equals 1 if the auditor is a Big 4 and 0
otherwise Table I.
Firm loss LOSS Dummy variable that equals 1 if the firm reported losses on the Variables definition/
prior year, and 0 otherwise measurement
IJAIM Variable Mean Minimum Maximum Median SD Skewness Kurtosis
24,2
DAC 0.093 0.000 0.848 0.065 0.096 3.066 19.295
INSOWN 0.076 0.000 0.297 0.057 0.075 0.824 3.069
OUTOWN 0.044 0.000 0.185 0.025 0.050 0.786 2.206
INSTOWN 0.190 0.000 0.435 0.150 0.177 0.188 1.373
148 EBH 0.069 0.000 0.288 0.067 0.063 0.871 3.906
FAMONW 0.452 0.000 0.975 0.450 0.307 0.286 2.104
FOROWN 0.151 0.000 0.985 0.070 0.164 2.509 11.649
BRDIND 0.450 0.143 0.900 0.400 0.234 0.283 1.821
BRDMEET 6.319 6.000 12.000 6.000 1.185 4.040 18.632
BRDSIZE 8.302 3.000 14.000 9.000 2.210 0.104 3.852
ACIND 0.522 0.200 1.000 0.333 0.311 0.599 1.636
ACMEET 5.048 4.000 6.000 6.000 0.986 ⫺0.097 1.039

ACSIZE 4.310 3.000 6.000 4.000 1.155 0.273 1.628
FRMSIZE 4.900 0.942 8.860 1.280 1.140 4.706 28.761
FRMGRTH 1.581 0.000 6.540 1.250 1.147 1.828 6.846
FRMAGE 22.010 2.000 62.000 17.000 14.289 0.897 3.143
ROA 0.241 ⫺7.811 8.841 0.053 1.871 0.917 14.664
Table II. LEV 0.121 0.000 0.926 0.000 0.235 2.150 6.661
Descriptive statistics CFO 0.104 ⫺4.918 6.909 0.058 1.220 1.196 18.756
of variables BIG4 0.774 0.000 1.000 1.000 0.419 ⫺1.312 2.720
(N ⫽ 496) LOSS 0.329 0.000 1.000 0.000 0.470 0.730 1.532
the Jordanian companies manage their reported earnings. This result was in accordance
with Sánchez-Ballesta and García-Meca (2007), as they found the mean of the absolute
value of discretionary accruals to be 5.7 per cent, while Wang (2006) found the mean of
the absolute value of discretionary accruals to be 5.6 per cent. Klein (2002) also showed
a minimum value of the absolute value of discretionary accruals to be 0.0002, and the
average absolute of discretionary accruals to be 11 per cent. Depending on the
assumption that discretionary accruals represent the discretion of managers over
accruals, this assumption was confirmed through the major differences between the
absolute value of discretionary accrual means.
The mean presence of managerial ownership (insider) and outsider managerial
ownership was 7.6 and 4.4 per cent, respectively, proposing the presence of low
proportion of shares held by managers in certain companies. External blockholder had
a mean of 6.9 per cent, as Jordanian companies have small external blockholders.
Institutional ownership variable showed that, on average, companies have a high level
of institutional investors (19 per cent). Meanwhile, family ownership mean showed the
high value of 45.2 per cent, while foreign owner ownership showed only a mean of 15.1
per cent. These data provided evidence that the percentage of family ownership is
higher, suggesting that majority of companies in Jordan has family investors.
Particularly, this will clarify the higher ownership concentration in Jordan.
Regarding the variables of board characteristics, the mean for board independence
was observed at around 45 per cent, suggesting that there are large differences across
different companies for this variable. Company boards meet, on average, six (mean ⫽
6.3) times per year. Also, boards are formed by eight (mean ⫽ 8.3) members, which
ranges from 3 to 14 members, suggesting that companies have to ensure that there is an
adequate number of directors on the board to conduct monitoring jobs. Regarding audit Ownership
committee characteristics, the results showed, on average, 52.2 per cent of the members structure and
to be independent. The audit committee meets, on average, five times, audit committees
comprise four (mean ⫽ 4.3) members. The results of audit committees’ variables
earnings
suggested the presence of a higher proportion of independent members, adequate management
number of meetings held during the year and sufficient committee members to monitor
the financial reporting process. 149
Furthermore, the company size mean was found to be approximately JD 4.9mn; 1.58,
on average, is the growth of the company; and 22 years is the company age average. The
companies were observed to document a return on assets average of 24.1 per cent; the
average level of company leverage is 12.1 per cent; and the cash flow from operations is,
on average, 10.4 per cent. Finally, 77.4 per cent of firms are audited by the Big 4 auditing
firms and 32.9 per cent of firms documented losses in the prior year.
Table III presents the Pearson correlation matrix. None of correlation among the
independent variables was adequately highly correlated (⬎0.90) to constitute
multicollinearity threats (Gujarati, 2003). The variance inflation factor (VIF) test results
showed that none of the VIFs exceeded 10, which is the threshold that multicollinearity
may start to become an issue (Gujarati, 2003).
4.2 Multivariate analysis

One of the ultimate commonly used techniques of multivariate analysis is the regression
test. Normally, parametric tests are strongly supportive when whole assumptions
(normality, linearity, homoscedasticity and independence error) are met (Gujarati, 2003;
Judge et al., 1985). Nevertheless, if some of the assumptions are violated by the nature of
data, non-parametric tests appear more appropriate (Greene, 2007).
The parametric test assumption is inspected by Skewness–Kurtosis to examine for
the normality assumption. Table II shows that the Skewness–Kurtosis for numerous
variables revealed high values. Data can be considered to be normally distributed if the
standard skewness is within ⫾1.96 and standard kurtosis ⫾2 (Habbash, 2010). Some of
the independent variables and the dependent variable were observed to be not normally
distributed. The non-existence of normality of the dependent variable (discretionary
accruals) was anticipated.
The Hausman test differentiates between fixed-effects and random-effects through
analysis of correlation among the x variables and the individual random-effects ␧i.
Hausman analysis inspects for stringent exogeneity. If no correlation is predicated,
random-effects should be used. Accordingly, a vigorous assumption for selecting the
valuation of random-effects is that the hidden heterogeneity should not be correlative
with the independent variables. The Hausman analysis is used to investigate this
presumption, as well as to investigate the suitability of using the random-effects
valuation (Greene, 2007; Habbash, 2010). The non-significant result attained from the
Hausman test x2 of 14.09 (p ⫽ 0.201) showed that the assumptions for the valuation of
random-effects are not disregarded. Hence, a pooled cross-sectional generalised least
squares (GLS) random-effects model was utilised to examine the proposed associations.
Statistical data check was attained using the computer software, STATA.
Table IV shows the results of the GLS random-effects regression for the variables.
The results specified that the model is significant with R2 of 0.509. This result is
consistent with prior studies in similar areas such as those of Sánchez-Ballesta and
24,2
150
IJAIM
(N ⫽ 496)
Table III.
for variables
Pearson correlation
No. Variable 1 2 3 4 5 6 7 8 9 10
1 INSOWN 1.000
2 OUTOWN 0.388*** 1.000
3 INSTOWN 0.406*** 0.473*** 1.000
4 EBH 0.331*** 0.299*** 0.327*** 1.000
5 FAMOWN 0.381*** 0.400*** 0.571*** 0.290*** 1.000
6 FOROWN 0.035 0.136 0.360*** 0.071 0.345*** 1.000
7 BRDIND 0.173* 0.390*** 0.411*** 0.299*** 0.296*** 0.222** 1.000
8 BRDMEET ⫺0.025 0.027 0.041 0.025 ⫺0.028 0.110 0.036 1.000
9 BRDSIZE 0.046 0.092 0.045 0.127 0.073 0.056 0.120 0.033 1.000
10 ACIND 0.207** 0.296*** 0.442*** 0.280*** 0.285*** 0.207** 0.325*** 0.118 0.046 1.000
11 ACMEET 0.459*** 0.390*** 0.489*** 0.365*** 0.352*** 0.231** 0.431*** 0.028 0.147 0.358***
12 ACSIZE 0.403*** 0.252** 0.326*** 0.282*** 0.250** 0.205** 0.306*** ⫺0.009 0.232** 0.186*
13 FRMSIZE 0.052 ⫺0.023 ⫺0.029 0.048 0.084 0.003 ⫺0.116 ⫺0.059 0.273*** ⫺0.022
14 FRMGRTH ⫺0.060 ⫺0.045 ⫺0.024 ⫺0.010 0.029 0.034 ⫺0.029 0.184* ⫺0.194* 0.172*
15 FRMAGE 0.018 ⫺0.001 ⫺0.073 ⫺0.133 0.059 0.194* 0.060 0.109 0.154 ⫺0.014
16 ROA ⫺0.039 0.016 0.024 ⫺0.072 0.073 ⫺0.013 0.014 0.003 0.060 0.025
17 LEV 0.155 0.147 0.264*** 0.068 0.249** 0.233** 0.187* ⫺0.081 0.017 0.140
18 CFO 0.016 0.017 ⫺0.009 0.007 0.079 0.054 ⫺0.022 0.020 0.048 0.126
19 BIG4 0.145 0.220** 0.290*** 0.081 0.373*** 0.183* 0.151 0.060 0.033 0.316***
20 LOSS ⫺0.282*** ⫺0.321*** ⫺0.484*** ⫺0.225** ⫺0.358*** ⫺0.160 ⫺0.298*** 0.033 ⫺0.008 ⫺0.271***
11 12 13 14 15 16 17 18 19 20
11 ACMEET 1.000
12 ACSIZE 0.486*** 1.000
13 FRMSIZE 0.049 0.160 1.000
14 FRMGRTH ⫺0.083 ⫺0.128 ⫺0.116 1.000
15 FRMAGE 0.016 0.014 ⫺0.001 0.183* 1.000
16 ROA ⫺0.030 ⫺0.064 0.070 0.113 0.032 1.000
17 LEV 0.213** 0.098 ⫺0.019 ⫺0.045 0.074 ⫺0.017 1.000
18 CFO ⫺0.008 0.015 0.019 0.095 0.050 0.133 0.088 1.000
19 BIG4 0.222** 0.091 ⫺0.048 0.139 0.123 0.114 0.067 0.033 1.000
20 LOSS ⫺0.296*** ⫺0.237** ⫺0.018 0.017 0.040 0.032 ⫺0.302*** ⫺0.024 0.162 1.000
Notes: *** Significant at 0.01 level; ** Significant at 0.05 level; and * Significant at 0.10 level
Instrumental variables
GLS (random-effects) OLS (fixed-effects) (2SLS)
DAC Predicted sign Coefficient z Coefficient t Coefficient t
INSOWN – ⴚ0.133 ⴚ2.49** ⴚ0.138 ⴚ2.64*** ⴚ0.138 ⴚ2.64***

OUTOWN – 0.075 0.96 0.074 0.97 0.074 0.97
INSTOWN – ⴚ0.056 ⴚ2.03** ⴚ0.056 ⴚ2.09** ⴚ0.056 ⴚ2.09**
EBH – ⴚ0.154 ⴚ2.62*** ⴚ0.156 ⴚ2.71*** ⴚ0.156 ⴚ2.71***
FAMOWN – ⴚ0.038 ⴚ2.59*** ⴚ0.037 ⴚ2.63*** ⴚ0.037 ⴚ2.63***
FOROWN – ⴚ0.042 ⴚ1.82* ⴚ0.038 ⴚ1.73* ⴚ0.038 ⴚ1.73*
BRDIND – ⴚ0.069 ⴚ4.12*** ⴚ0.067 ⴚ4.11*** ⴚ0.067 ⴚ4.11***
BRDMEET – ⴚ0.001 ⴚ0.45 ⴚ0.001 ⴚ0.45 ⴚ0.001 ⴚ0.45
BRDSIZE – ⴚ0.005 ⴚ3.27*** ⴚ0.005 ⴚ3.41*** ⴚ0.005 ⴚ3.41**
ACIND – ⴚ0.033 ⴚ2.69*** ⴚ0.033 ⴚ2.68*** ⴚ0.033 ⴚ2.68***
ACMEET – ⴚ0.009 ⴚ2.09** ⴚ0.009 ⴚ2.00** ⴚ0.009 ⴚ2.00**
ACSIZE – ⴚ0.007 ⴚ2.16** ⴚ0.007 ⴚ2.11** ⴚ0.007 ⴚ2.11**
FRMSIZE ? 6.900 2.27** 7.110 2.42** 7.110 2.42**
FRMGRTH ? 0.011 3.62*** 0.011 3.75*** 0.011 3.75***
FRMAGE ? ⴚ0.001 ⴚ1.66* ⴚ0.001 ⴚ1.77* ⴚ0.001 ⴚ1.77*
ROA ? ⴚ0.005 ⴚ2.60*** ⴚ0.005 ⴚ2.69*** ⴚ0.005 ⴚ2.69***
LEV ? ⴚ0.028 ⴚ1.89* ⴚ0.028 ⴚ1.95** ⴚ0.028 ⴚ1.95**
CFO ? 0.005 1.76* 0.005 1.82* 0.005 1.82*
BIG4 ? ⴚ0.030 ⴚ3.18*** ⴚ0.030 ⴚ3.26*** ⴚ0.030 ⴚ3.26***
LOSS ? 0.003 0.35 0.004 0.46 0.004 0.46
CONSTANT 0.336 12.14 0.331 12.20 0.331 12.20
R2 0.509 R2 0.509 R2 0.509
Wald chi2 0.000 Adjusted R2 0.488 Adjusted R2 0.488
Probability ⬎ chi2 0.000 F(20, 475) 24.62 F(20, 475) 24.62
Probability ⬎ F 0.000 Probability ⬎ F 0.000
Notes: *** Significant at 0.01 level; ** Significant at 0.05 level; and * Significant at 0.10 level
Table IV.
151
variables (N ⫽ 496)
management
earnings
Ownership
Regressions for the

structure and
IJAIM García-Meca (2007) and Siregar and Utama (2008). In addition, the lowest R2 for being
24,2 considered statistically significant, through six independent variables, as well as higher
than 400 observations sample, would be 0.500 (Cohen and Cohen, 1983).
According to the expectations of this research, the insider managerial ownership
variable showed the anticipated sign and was statistically significant at the 5 per cent
level. Therefore, H1 was accepted, and it was concluded that the percentage of insider
152 managerial ownership sitting on the board would reduce earnings management and
enhance FRQ. This finding is consistent with previous studies (Teshima and Shuto,
2008; Warfield et al., 1995), which also provided evidence of the negative influence of this
variable on earnings management. Contrary to this study’s predictions, the proportion
of outsider managerial ownership sitting on the board variable revealed an unexpected
sign, and it was statistically insignificant. Hence, H2 was not accepted and concluded
that this result showed that outsider managerial ownership on the board would exercise
lower effects compared to other members of the board concerning the demand for lower
earnings management and higher FRQ.
The institutional ownership variable showed the anticipated sign and was
statistically significant at the 5 per cent level. Consequently, H3 can be accepted,
and it was surmised that institutional investors are probable to actively monitor
their investments because of the large amount of wealth they invested. This
evidence is consistent with previous study that documented institutional ownership
to be effective in constraining earnings management and improving FRQ (Siregar
and Utama, 2008). External blockholder variable showed the anticipated sign and
was statistically significant at the 1 per cent level. Thus, accordingly, H4 can be
accepted, and it was concluded that the larger the external blockholder is, the more
effective the monitoring functions. Prior research reported the presence of large
shareholder ownership to be effective in restraining earnings management and
enhancing FRQ (Klein, 2002).
According to family ownership variable, the result exhibited the anticipated sign
and was statistically significant at the 1 per cent level. Therefore, H5 can be
accepted, and it was surmised that greater family ownership reports a lower level of
discretionary accruals. This result is consistent with prior studies and shows that
earnings of family companies have higher FRQ (Ali et al., 2007; Wang, 2006). The
foreign ownership variable was observed to have the anticipated sign and was
statistically significant at the 10 per cent level. Accordingly, H6 can be accepted,
and it was concluded that the higher the extent of foreign ownership, the less likely
earnings management would occur and, hence, higher FRQ. Prior research showed
that the firms with higher foreign ownership engage less in discretionary accruals
(Chung et al., 2004; Guo et al., 2014).
In summary, the ownership structure analysis showed that the proportion of
insider managerial ownership, institutional ownership, external blockholder, family
ownership and foreign ownership has the potential to reduce earnings management
and, in turn, enhance FRQ. Consequently, these findings exposed the significant role
that ownership of Jordanian companies play to be a good mechanism of corporate
governance.
Among the control variables, board independence result had the anticipated sign
and was statistically significant at the 1 per cent level. This finding is in line with the
view that the increased existence of outside independent directors contributes to
constraining the level of earnings management. Comparable findings were revealed Ownership
by Peasnell et al. (2005). The number of board meetings variable showed the structure and
anticipated sign, but it was statistically insignificant. This result meant that board
meetings are not inevitably beneficial, as daily routine and duties greatly restrict
earnings
CEO’s and director’s time to set the board meeting agenda. Habbash (2010) reported management
a similar result. Board size variable showed the anticipated sign and is statistically
significant at the 1 per cent level. This result indicated that larger boards increase 153
the expertise diversity on the board including financial reporting expertise, and in
turn, can be effective in monitoring managerial behaviour, therefore, reducing
earnings management and improving FRQ. Prior research reported similar results
(Xie et al., 2003).
The result of the audit committee independence presented the expected sign and was
statistically significant at the 1 per cent level. This result revealed that the presence of
independent audit committee members could reduce earnings management activities
and enhance FRQ. This finding is along the lines of previous studies (Sharma and
Kuang, 2014), which also produced evidence of negative influence on earnings
management. The audit committee meeting variable presented the expected sign and
was statistically significant at the 5 per cent level. This indicated that frequency of
meetings during the year could be effective in limiting earnings management practices.
Prior studies reported a similar result (Abbott et al., 2004). The audit committee size
variable produced the expected sign and was statistically significant at the 5 per cent
level. This result indicated that larger audit committees mitigate earnings management
activities, as larger audit committees have more resources and capabilities, and
therefore, are better in performing the required duties. Similar results were reported by
Yang and Krishnan (2005).
Firm size, firm growth and cash flow from operations were statistically significant
and positive at the 5, 1 and 10 per cent levels, respectively. These results suggested that
large firms, by means of total assets, high growth companies and higher operating cash
flows may be associated with earnings management to achieve specific earnings
targets. Dimitropoulos and Asteriou (2010) found similar results. Firm age, return on
assets, leverage and Big 4 audit firm variables were statistically significant and
negative at the 10, 1, 10 and 1 per cent levels, respectively. These findings offer evidence
that larger firm age, high level of return on assets, lower level of leverage and Big 4
auditors are likely to provide lower earnings management and higher FRQ. Comparable
findings were published by prior studies (Bedard et al., 2004; Chi et al., 2011; Gul et al.,
2009; Park and Shin, 2004).
4.3 Additional analysis

One predominant method to heteroscedasticity correction is the use of robust
standard error (RSE). RSE addresses the error-related problem of being
non-independent and similarly distributed. The use of RSE will not change the
coefficient valuations produced through ordinary least squares (OLS) regression;
however, they will change the standard errors and significant analyses. Hence, RSE
OLS regression could be considered reliable in the presence of heteroscedasticity.
With regard to sensitivity, a parametric test using RSE OLS (fixed-effects) was
implemented as a robustness test of the foremost findings (Dimitropoulos and
Asteriou, 2010). The findings showed that there are no differences amid the main
IJAIM investigation using the non-parametric tests and the findings of the parametric
24,2 investigation. The results revealed comparable significance levels, and the
coefficient showed comparable directions for all variables. The result revealed that
by using different relevant statistical methods, this study’s findings are deemed
robust. The influence of several discretionary accruals estimates (e.g. total accruals
and current accruals) to derive this study earnings management dependent variable
154 was investigated. Utilising these estimations provided findings which are largely
qualitatively comparable. Finally, so as to control for possible bias in the
discretionary accruals estimation in the modified Jones model, this study used
alternative accruals’ decomposition models, for example, the models produced by
DeFond and Park (2001) and Francis and Wang (2008). Results from the estimation
of modified Jones model depended on the alternate discretionary accruals valuation
to produce findings that are qualitatively similar to the findings presented in

Table IV.
The foremost supposition of the OLS regression is the homogeneity of residual
variance. There must be no pattern to the residuals plotted opposed to the fitting
values if a model is tight-fitting. If the residual variance is not consistent,
subsequently, the variance of the residual is assumed to be heteroscedastic. For the
sake of heteroscedasticity, the most popular approach is the RSE utilisation. The
RSE reports the error problem which is not identical as well as independently
distributed. The RSE employment will not convert the coefficient assessments
produced through OLS; however, they will convert the significance analyses and
standard errors. Thus, RSE OLS regression is reliable to measure the incidence for
heteroscedasticity. In the sensitivity test, the parametric analysis using the RSE
OLS with fixed-effects was implemented as a robust inspection of core results
(Dimitropoulos and Asteriou, 2010). Table IV displays that there are no variances
among the chief tests adopting the non-parametric analysis, as well as the
parametric analysis for the findings. The R2 reveals the same value; the findings
reveal a similar significance level as well as that the coefficients present similar
directions of the complete variables, except for insider managerial ownership, where
the level of significance dropped from 5 to 1 per cent, as well as firm leverage with
the level of significance dropping from 10 to 5 per cent. The result showed that by
using various pertinent statistical procedures, this would suggest that the results of
this study can be considered robust.
Even though earnings management studies use single-equation regression models,
limited contemporary studies recommended that a simultaneous equations technique
could be further applicable, as models encompassing governance mechanisms bear
endogeneity (McKnight and Weir, 2009). The current research used an instrumental
variables’ two-stage regression (2SLS) technique test, as well as the endogenous
variables’ lagged values, as instruments. In this test, whole variables were deliberated
as endogenous. The Hausman analysis was used to examine if there is an endogeneity
bias of independent variables (Greene, 2007). The result of the Hausman analysis
showed non-significant evidence of endogeneity bias by 5 per cent (w2 ¼ 3.089, p ⫽
0.199), which has two imperative imputations. First, comparable findings must be
acquired using either 2SLS or OLS. Second, the independent variables lagged are
probable of being useable instrumental variables, as they permit the Hausman analysis.
Table IV presents the 2SLS findings, which are consistent with the OLS findings
documented previously. Accordingly, endogeneity does not look like to excessively Ownership
impact the findings of this research. structure and
earnings
5. Concluding remarks management
A particular agency problem has caused growing existence of ownership structure
(insider managerial ownership, outsider managerial ownership, institutional
ownership, external blockholder, family ownership and foreign ownership) as directors. 155
Although substantial studies were performed on corporate governance, particularly in
ownership structure, limited study has occurred investigating the emerging economies.
Therefore, given the significance of ownership structure in allocating capital to firms
and their governance role in the company, a comprehensive study, of exactly how their
existence on the board of directors influences earnings management, is undoubtedly
needed. This research contributed to the published literature by producing evidence of

the influence of ownership structure on FRQ, measured by earnings management. This
study examined the effectiveness of ownership structure in Jordan – a country
characterised by highly concentrated ownership.
Thus, it is proposed in this paper that the type of ownership structure is a crucial
issue in characterising the role effects on FRQ. Accordingly, different aspects of
ownership were focused upon and their influence on earnings management was
analysed. The results suggested that the five aspects of ownership structures are
effective as monitors of management, leading to lower earnings management and higher
FRQ.
The findings obtained in this study are conditional on certain limitations that
must be considered before the findings are interpreted. First, the writers admit that
this study’s analyses can be considered exploratory. Additional examinations,
predominantly on the JCGC recommendation of the board of directors and audit
committees, are warranted given that there is a limited amount of study performed
after the introduction of the JCGC. Second, a limited number of variables associated
with corporate governance were selected in the current research, which may restrict
the generalizability of the results. A significant issue not examined in this research
is government ownership. Furthermore, provided that corporate governance itself is
a problematic construct to measure, also with the existence of possible
complementary, as well as substitutive influence of a diversity of corporate
governance practices, future research can benefit through utilising a cautiously
designed index.
Given the results’ limitation delineated above, the results from this exploratory
research could generously contribute towards the corporate governance literature,
especially in the context of emerging economies like Jordan. This research
contributes to the literature by concluding that one of the ways in which ownership
structure plays a monitoring role is by affecting earnings management and
enhancing FRQ when there exist appropriate levels of insider managerial
ownership, institutional ownership, external blockholder, family ownership and
foreign ownership. The results also advocated that both policymakers and
researchers should no longer deliberate on ownership structure as a whole, as
directors (outsider managerial ownership) have varied influences on earnings
management. Finally, the findings have important implications for regulators, as
well as supervisors, whose role in protecting the financial reporting system can be
IJAIM assisted through a more comprehensive understanding of how ownership structure
24,2 affects FRQ in the company. Hence, the findings have implications for policymakers
who are looking for an appropriate model for ownership structure.
Notes
1. The adjustment for receivable changes is used in the anticipations model. To evaluate the
156 industry specific regression coefficients in equation (2), the Jones model was applied
(Davidson et al., 2005; Dechow et al., 1995).
2. Whole variables in the model of accruals anticipations [equation (2)] were scaled through
lagged assets to decrease heteroscedasticity, as it was presumed that lagged assets are
positively related to the disturbance term variance (Davidson et al., 2005; Jones, 1991).
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Corresponding author
Ebraheem Saleem Salem Alzoubi can be contacted at: alzoubiess@gmail.com
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Ownership structure and Ownership

manage earnings to maximise their personal benefits or to be indicative of their own

2. Literature review and hypotheses development

2.1 Managerial ownership

H1. Insider managerial ownership is negatively associated with earnings

2.2 Institutional ownership

2.3 External blockholders

relationship between external blockholder ownership and earnings management, thus

2.4 Family ownership

2.5 Foreign ownership

3.2 Measuring earnings management

NDACijt ⫽ ␣=j (1/TAijt1 ) ⫹ ␤ˆ 1j(⌬REVijt – ⌬RECijt /TAijt1 ) ⫹ ␤ˆ 2j(PPEijt /TAijt⫺1 ) (1)

TACijt /TAijt1 ⫽ ␣j(1/TAijt1 ) ⫹ ␤1j(⌬REVijt /TAijt1 ) ⫹ ␤2j(PPEijt /TAijt1 ) ⫹ ␧ijt (2)

TACijt ⫽ NIijt ⫺ OCFijt (4)

3.3 Control variables

3.4 Regression model and variables definition

4. Empirical results and discussion

Variables Acronym Definition

ACMEET 5.048 4.000 6.000 6.000 0.986 ⫺0.097 1.039

4.2 Multivariate analysis

INSOWN – ⴚ0.133 ⴚ2.49** ⴚ0.138 ⴚ2.64*** ⴚ0.138 ⴚ2.64***

Regressions for the

4.3 Additional analysis

to produce findings that are qualitatively similar to the findings presented in

needed. This research contributed to the published literature by producing evidence of

the implications of corporate governance best-practice principles for Taiwanese listed

1. BruwerJuan-Pierré, Juan-Pierré Bruwer, CoetzeePhilna, Philna Coetzee, MeiringJacolize, Jacolize

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