Ownership Structure and Earnings

Management: Evidence from Portugal

Sandra Alves1

Abstract

This paper examines the relationship between corporate ownership structure in Portugal and
earnings management. The Portuguese governance structure is characterised by the dominance of
the largest shareholder who typically exercises significant influences on management decisions
directly or indirectly. Existing literature suggests that ownership structure decreases the incentive to
manage earnings but also provides the opportunity and incentive to manipulate earnings. Therefore,
the main purpose of this paper is to analyse whether a firms ownership structure (measured with
three variables: managerial ownership, ownership concentration and institutional ownership)
exacerbate or alleviate earnings management. Using a sample of 34 non-financial listed Portuguese
firms for years from 2002 to 2007, we find that discretionary accruals as a proxy for earnings
management is negatively related both to managerial ownership and to ownership concentration.
The studys results suggest that both managerial ownership and ownership concentration improve
the quality of annual earnings by reducing the levels of earnings management.

Keywords: Earnings management, Discretionary accruals, Ownership structure, Ownership

concentration.

JEL Classification: M410, G32, G34.

1
University of Aveiro, Portugal
E-mail: sandra.alves@ua.pt

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