TY - JOUR

T1 - Decomposition of Managerial Shareholding

T2 - Role of Monetary Incentives and Control Rights in Financial Misreporting

AU - Ahn, J.H.

PY - 2021/10/31

Y1 - 2021/10/31

N2 - Previous research indicates a non-monotonic effect of managerial shareholding on various issues, such as firm value, earnings quality, and debt costs. These studies tend to explain non-linearity in terms of convergence of interests and managerial entrenchment, and use non-linear specifications of managerial shareholding, such as piecewise variables, to capture the countervailing effects. However, such research has been criticized for its arbitrary construction of piecewise variables. This study examines the link between managerial shareholding and misreporting by disentangling shareholding into monetary incentives and control rights, captured using CEO stock delta and voting premium, respectively. Consistent with alignment of interests and managerial entrenchment, it provides consistent evidence that CEOs’ monetary incentives regarding shareholding are negatively associated, whereas CEOs’ voting rights are positively associated with a propensity to misreport. Further analysis indicates that managerial entrenchment arises because owner-CEOs create more favorable conditions for misreporting via the board selection process. Overall, the findings confirm the well-known non-monotonic effect of managerial shareholding with new evidence and additional insights. In particular, the results provide greater assurance of non-linearity in managerial shareholding by revealing its underlying mechanisms without using conventional piecewise variables. © 2021, Korean Accounting Association. All rights reserved.

AB - Previous research indicates a non-monotonic effect of managerial shareholding on various issues, such as firm value, earnings quality, and debt costs. These studies tend to explain non-linearity in terms of convergence of interests and managerial entrenchment, and use non-linear specifications of managerial shareholding, such as piecewise variables, to capture the countervailing effects. However, such research has been criticized for its arbitrary construction of piecewise variables. This study examines the link between managerial shareholding and misreporting by disentangling shareholding into monetary incentives and control rights, captured using CEO stock delta and voting premium, respectively. Consistent with alignment of interests and managerial entrenchment, it provides consistent evidence that CEOs’ monetary incentives regarding shareholding are negatively associated, whereas CEOs’ voting rights are positively associated with a propensity to misreport. Further analysis indicates that managerial entrenchment arises because owner-CEOs create more favorable conditions for misreporting via the board selection process. Overall, the findings confirm the well-known non-monotonic effect of managerial shareholding with new evidence and additional insights. In particular, the results provide greater assurance of non-linearity in managerial shareholding by revealing its underlying mechanisms without using conventional piecewise variables. © 2021, Korean Accounting Association. All rights reserved.

KW - Control rights

KW - Convergence of interests

KW - Financial misreporting

KW - Managerial entrenchment

KW - Managerial shareholding

U2 - 10.24056/KAR.2021.10.005

DO - 10.24056/KAR.2021.10.005

M3 - Journal article

VL - 46

SP - 165

EP - 197

JO - Korean Accounting Review

JF - Korean Accounting Review

IS - 5

ER -