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The value of executive director share ownership and discretionary accruals

Khan, Arifur and Mather, Paul 2013, The value of executive director share ownership and discretionary accruals, Accounting research journal, vol. 26, no. 1, pp. 35-55, doi: 10.1108/ARJ-02-2012-0011.

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Title The value of executive director share ownership and discretionary accruals
Author(s) Khan, ArifurORCID iD for Khan, Arifur orcid.org/0000-0003-4984-8021
Mather, Paul
Journal name Accounting research journal
Volume number 26
Issue number 1
Start page 35
End page 55
Total pages 21
Publisher Emerald
Place of publication Bingley, England
Publication date 2013
ISSN 1030-9616
Keyword(s) Directors
Entrenchment
Incentive alignment
Discretionary accruals
Value of executive director share ownership
Shares
Chief executives
Summary Purpose – The purpose of this paper is to investigate the relation between the value of executive director share ownership and discretionary accruals.

Design/methodology/approach – This study uses a dataset of 1,173 firm-year observations drawn from 188 Australian listed companies for the period 2000-2006. The analysis is based on multivariate regression analysis and ordinary least square models were used to investigate the relation between the value of managerial ownership and discretionary accruals. The issue of potential endogeneity is addressed by using a simultaneous equation system.

Findings – A negative relation is found between value of managerial share ownership and discretionary accruals at lower levels of value of ownership, which is consistent with the theorised incentive alignment that as the managers commit more resources to their firms, stakeholders impose less contractual constraints specified in terms of accounting numbers and managers make lower accrual adjustments. After a certain level of value of ownership is attained, a positive relations seen, consistent with increased discretionary accrual adjustments associated with stakeholders anticipating managerial entrenchment. Also, it is found that these results are driven by firms with income increasing, as opposed to income decreasing, discretionary accruals.

Practical implications – Shares and options are forming an increasing proportion of executive remuneration that continues to be the subject of much debate amongst regulators and in the media. Showing that the value of share ownership may be an effective internal governance mechanism to help align incentives adds to the debate and has policy implications.

Originality/value – The paper's primary contribution is finding that the value (as opposed to proportion) of share ownership, typically representing a sizeable proportion of managers' undiversified wealth, is a potentially direct driver of theorised incentive alignment and entrenchment effects associated with share ownership.
Language eng
DOI 10.1108/ARJ-02-2012-0011
Field of Research 150103 Financial Accounting
Socio Economic Objective 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2013, Emerald
Persistent URL http://hdl.handle.net/10536/DRO/DU:30053070

Document type: Journal Article
Collections: School of Accounting, Economics and Finance
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Created: Fri, 21 Jun 2013, 13:55:40 EST by Aysun Alpyurek

Every reasonable effort has been made to ensure that permission has been obtained for items included in DRO. If you believe that your rights have been infringed by this repository, please contact drosupport@deakin.edu.au.