Managerial Ownership and Real Activities Earnings Management

Abstract

This research examines the relationship between managerial ownership and opportunistic managerial behavior relating to earnings management. Two apparently conflicting effects of managerial ownership on managers' incentives: the incentive alignment effect and the management entrenchment effect. Following previous research, abnormal operating cash flows, abnormal production costs, and abnormal discretionary expenses are used as a proxy for real activities earnings management. A new proxy for managerial ownership is developed in this research to capture the institutional setting of listed firms in Jordan. Using a sample of manufacturing firms listed on Amman Stock Exchange between 2017 and 2021, the results suggest that managerial ownership improves the quality of annual earnings by reducing the levels of abnormal operating cash flows and abnormal production costs but not abnormal discretionary expenses. This finding substantiates the incentive alignment effect in Jordan.