Private Control Benefits and Earnings Management: Evidence from Insider Controlled Firms

Abstract

We examine earnings management practices of insider controlled firms across 22 countries to shed light on the link between consumption of private benefits and earnings management. Insider controlled firms are associated withmoreearnings management than noninsider controlled firms in weak investor protection countries. Consistent with the private benefits motive, insider controlled firms with greater divergence between cash-flow rights and control rights are associated with more earnings management in these countries. Growth opportunities attenuate the association between insider control and earnings management even in weak investor protection countries. We also find some weak evidence that insider controlled firms are associated withlessearnings management in strong investor protection countries. Overall, our results highlight a strong link between private benefits consumption and earnings management.