







































Asian Themes in Social Sciences Research 
ISSN: 2578-5516 

Vol. 6, No. 1, pp. 12-24 
2022 

DOI: 10.33094/atssr.v6i1.66 
© 2022 by the authors; licensee Online Academic Press, USA 

 
Accepted: 1 April 2022 | Published: 11 May 2022 

12 
© 2022 by the authors; licensee Online Academic Press, USA 

  

 
 
 
 

Effect of Ownership Structure on Earnings Management in 
Listed Manufacturing Firms at Nairobi Securities Exchange, 
Kenya 
 

 

John Gikonyo Mwangi1* --- Tabitha Nasieku2 

 

1,2Jomo Kenyatta University of Agriculture and Technology, Kenya. 
1Email: Gikonyomwangi164@gmail.com   
2Email: tabithanasieku@gmail.com  

 
Abstract 

A firm's ownership structure is important to the effectiveness of monitoring the mechani sms 
used to manipulate earnings. Based on the ownership structure of a firm, management can feel 
pressure to manage earnings by manipulating the company's accounting practices to meet 
financial expectations. This paper focuses on how the three components of ownership structure  
affect earnings management of listed firms. That is to determine  the effect of ownership  

concentration, managerial ownership, and institutional ownership on earnings management of 
listed firms. As per the jones and modified Jones model, discretionary accruals were used as a 
measure of earnings management. The study deployed a random effects model and STATA 
software for data analysis. Data was collected for the period from 2011 to 2019 from all listed 
manufacturing firms in Nairobi securities exchange. The study findings indicated that 
managerial ownership, institutional ownership and ownership concentration have an 
insignificant effect on earnings management. The study indicated that while majori t y 
shareholders are keen to closely monitor the management to ensure that their interests are well 
protected, this can only be attained if they have requisite skills, knowledge, and experience. The  

study also indicated that most pertinent is to have strong internal controls in place that seals all 
possible loopholes that could be exploited by the management to manipulate earnings.  The study 
considered two control variables, firm size and growth which were also found to have an 
insignificant effect on earnings management. 
 
 

Keywords: Institutional ownership, Managerial ownership, Ownership concentration, Earnings management. 
Licensed:  This work is licensed under a Creative Commons Attribution 4.0 License.  

Funding: This study received no specific financial support.    
Competing Interests: The authors declare that they have no competing interests. 

 
 
1. Introduction 

The separation of ownership and control has seen the management pursue own interests at the expense of 
shareholders (principal). This basically is the agency problem where the agent fails to act in the best interests of 
the principal. Partly the pursuant of self-interests have been manifest in the form of earnings manipulation. 
Alareeni (2018) explains that the management manipulates earnings in a bid to attain set performance targets 
which is the basis of their bonuses and salary increments. However, Iraya, Mwangi, and Wanjohi (2014) adds 
that the management may also manipulate earnings in a bid to smooth out earnings and to signal the market 
that the company presents an ideal consideration for investment.   

Swai and Mbogela (2016) indicates that with strong corporate governance system in place, the loopholes 
exploited by top management to manipulate earnings are bound to be effectively sealed. This will eventually 
translate to reliable and quality financial reporting. Mohammadikhanghah, Piry, and Mansourfar (2020) opines 
that some of the incentives towards earnings management by top management are to earn bonuses or to enhance 

http://doi.org/10.33094/atssr.v6i1.66
mailto:Gikonyomwangi164@gmail.com
mailto:tabithanasieku@gmail.com


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the firm ability to raise capital both in the money and capital markets. In the context of corporate governance, 
Alareeni (2018) opines that curtailing earnings management requires a very strong board. Specifically, Alareeni 
(2018) underscores the value of board independence in offering quality oversight and control to the management. 
Laksmi and Kamila (2018) hold that board size, board diversity and CEO duality are also critical in enhancing 
quality control over the management to curb earnings manipulation. However, Bao and Lewellyn (2017) 
indicates that even with a strong board notably a highly independent board who may not be involved in day -to-
day activities, the management may connive to manipulate earnings. Ownership structure is cited as critical in 
giving a boast to a strong board in curtailing earnings management. Ownership  structure can simply be put as 
the distribution of ownership of equity in an entity (Mohammadikhanghah et al., 2020). Lassoued, Attia, and 
Sassi (2018) indicates that managerial and institutional ownership are the key dimensions under ownership  
structure bound to reduce instances of earnings manipulations. Managerial ownership entails ownership of stake 
by the top management in an entity. This aligns their interests with those of the shareholders and this is bound 
to reduce the incentives for earnings manipulation as such could affect the value of their stake in the future. 
Institutional ownership denotes the ownership of stake in an entity by institutional investors. Bao and Lewellyn 
(2017) indicates that institutional investors come with Knowledge and expertise critical in providing quality 
oversight to the management.  Other than institutional and managerial ownership, ownership concentration has 
been termed as critical in curbing earnings management. In summation reduction of the rising cases of earnings 
management in Listed Kenyan entities calls for enhanced ownership structure. Most notably is the need to 
enhance managerial ownership to align the interests of management to that of shareholders. The institutional 
ownership is also pertinent as institutional investors come with knowledge and expertise that promote quality 
oversight and monitoring of the corporate activities.   
 
1.1. Statement of the Problem  

The cases of earnings management continue to rise despite the advancements in global financial reporting 
standards and having an independent audit for all listed firms. Even in developed economies such as UK, the 
accounting manipulations has risen even among the FTSE 100 firms. For instance, in 2014, Tesco, one of the 
four largest retail firms in UK overstated its profits by £263 million. Following this revelation, the firm had its 
market value decline by a whooping £2bn and this meant massive shareholders’  wealth. Some of the analysts 

pointed to a weak corporate governance in the firm (Kizil & Kaşbaşı, 2018). The case is no different in emerging 
economies notably China which is bound to overtake US as the largest economy by 2030. In 2020, Luckin Coffee, 
a Chinese coffee company revealed that it had overstated its revenues in 2019 by a whooping $328 Million 
(Katanga, 2020). Other than being fined $180 million for intentionally overstating the revenues and 
understating its net loss in 2019, the firm was delisted  in US based NASDAQ. Wang (2020) holds that the 
company pledged to enhance its internal financial controls and adhere to best practices of corporate governance. 
This underscores the value of corporate governance in enhancing accountability and transparency in financial  
reporting.  In the same year (2020), the Chinese TAL education group had about 4% of its revenues fabricated. 
Upon the public knowledge of the misstatement, the firm’s shares dipped by 18% depicting massive loss of 
shareholders’ wealth. Developing economies deemed to still be at infant stages of capital market development 
have also reported numerous cases of earnings manipulation. A survey done Ernst and Young in 2018 that 
focused on 100 Kenyan firms revealed that 53% of firms were overreporting their financial performance (The 
East African, 2018). The report raised questions on the ability of the corporate boards and auditors in the wake 
of the glaring misstatements of financial reports in the Kenyan Corporations. In 2015, Deloitte was accused of 
conniving with top management of Mumias to conceal accounting flaws at the entity which has been hardly hit 
by financial woes even after being bailed out by the government. Mumias Outgrowers Company (Moco) accused 
the company of having declared false profits and contested a Sh2.6 billion outstanding loan demand from the 
miller, terming it as a false entry. Indubitably there are intense cases of earnings management globally that have 
seen shareholders lose massively. Strong corporate governance has been recommended in curbing the rising 
cases of earnings management. Specifically, ownership structure has been cited as a critical in fostering 
accountability and transparency in financial reporting. This study aimed at examining the effect of ownership  
structure on earnings management.  
 
1.2. Research Aim and Objectives 

The main aim of this study was to examine the effect of ownership structure on earnings management. This 
was facilitated by the following research objectives; 
(i) To examine the effect of managerial ownership on earnings management of listed manufacturing firms.  
(ii) To examine the effect of Institutional ownership on earnings management of listed manufacturing firms.  
(iii) To examine the effect of ownership concentration on earnings management of listed manufacturing firms.  
 

2. Literature Review  
2.1. Theoretical Literature  
2.1.1. Agency Theory 

The agency theory holds that the management is the agent who is bound to act in the best interests of the 
shareholders (principal). The agency problem crops up due to the manager acting to serve their interests at the 
expense of the shareholders. In line with earnings management, the management might manipulate earnings in 



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a bid to achieve set profit targets to earn bonuses (Laksmi & Kamila, 2018). The most cited solutions to the 
agency problem revolve around corporate governance. For instance, managerial ownership which is a 
component of ownership structure aligns the interests of management to that of shareholders.  Other cited 
solutions include board independence and board gender diversity to enhance control and oversight.  

Managerial ownership is pertinent in aligning the interests of the management to the interests of the 
corporate owners.  The management become owners of the entity as such they become more cautious in their 
approach to management and even in preparation of annual report. This is in recognition that any gaps in 
investment decisions and financial reporting could adversely affect their stake in the firm. However, Nguyen, 
Lien Le, and Anh Vu (2021) indicates that there are limitations of managerial ownership in that they become 
hesitant to pursue high risks that has potentially high returns. This could derail the growth of an entity and 
hence the need to explore other potential solutions to the agency problem.  

Institutional ownership and ownership concentration have been hailed as other potential solutions to the 
agency problem. Proponents of institutional ownership hold that institutional shareholders come with immense  
experience in corporate and industry operations and can effectively monitor the actions of management 
compared to individual investors. Alzoubi (2016) indicates that ownership concentration also helps to curb cases 
of earnings manipulation as the top shareholders are keen to closely monitor the management activities. This 
also includes ensuring that the firm has strong internal controls to seal loopholes that could be exp loited by the 
management to manipulate earnings.  
 
2.1.2. Stakeholder Theory 

Elghuweel, Ntim, Opong, and Avison (2017) explains that the management is expected act in the best 
interests of all stakeholders. Venturing in earnings management does not just hurt the shareholders but othe r 
stakeholders such as employees, lenders, and customers. This is because such manipulations have adverse effect 
on future operating performance and this could see delays in paying employees and supplies and deterioration 
of quality for goods sold to the customers. Outa, Eisenberg, and Ozili (2017) puts forth that a strong corporate  
governance is indispensable in ensuring the management balances between the diverse interests of stakeholders. 
Having in place a strong ownership structure notably institutional shareholders representation in the board, 
ensures that there is efficacy in the board effectiveness in exercising their control over the management.  
 
2.1.3. Positive Accounting Theory 

Positive accounting theory holds that accounting choices available for the management has seen rise of 
managerial opportunism. This basically is to say that managers may opt for certain accounting policies if such 
will serve their interests. For instance, the accounting policies under stock valuation gives three valuation 
techniques or methods, LIFO, weighted average, and FIFO. FIFO tends to understate the value of closing stock 
and this can see the gross profit rise and eventually the net earnings. The mot ivation could be either to report 
profits which allow mangers to get bonuses which are based on the net earnings of the company. Swai and 
Mbogela (2016) indicates that it could also be motivated by the intent to send a signal to the market that the 
performance of the firm has improved or has remained relatively stable. However, the repercussions are felt later 
by shareholder and Iraya et al. (2014) indicates that a strong corporate governance system will be able to curb 
such by promoting appropriate accounting policies for the company. Managerial ownership would reduce the 
incentives of management to use accounting policies to gratify their own interests.  
 
2.2. Empirical Literature  

Several scholars have ventured in examining the influence of ownership structure on earnings management. 
Table 1 offers a detailed summary of reviewed empirical literature.  

 
2.3. Summary and Critique of the Literature  

The review of theoretical literature highlights three critical theories, agency theory, stakeholder theory and 
positive accounting theory. Most striking is the agency theory which explains the principal agent relationship  
which yields an agency problem where the management pursue their own interest at the detriment of 
shareholders (corporate owners). Ownership structure in form of managerial ownership, institutional ownership  
and ownership concentration is suggested as potential solution to agency problem which manif ests itself partly 
through earnings management. Most of the reviewed studies indicates that managerial ownership, institutional 
ownership, and ownership concentration help to dimmish cases of earnings management. Managerial ownership  
aligns the interests of the management to that of the shareholders. This drives the top management to engage 
in activities that promotes shareholders value and shun such tendencies as earnings manipulation. Institutional 
shareholders come expertise, knowledge and experience which is critical in providing quality oversight to the 
management. High ownership concentration means that top shareholders are keener to protect their interests 
due to the large stake in the entity and as such will closely monitor corporate activities and management actions.   

There are gaps in extant literature as has been reviewed in the above sections. Firstly, there are 
methodological research gaps. There is no clarity as to whether most of the empirical studies focus on real 
earnings management or accrual earnings management. Secondly, several studies have not effectively proxied 
earnings management. Some studies have used earnings quality as an indicator of earnings management while 
others have adopted the modified jones model which support the computation of discretionary accruals as an 



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indicator of accruals earnings management. Earnings quality is quite distinct from earnings management. 
Studies should focus at examining the two cases of earnings, real earnings and accrual earnings management as 
listed entities are facing these two forms of earnings management.  

 
Table 1. Summary of empirical literature. 

Topic  Author, Year, 

country  

Objectives  Methodology  Findings and 

Recommendations  
The effect of 
corporate 

governance 
practices on 
earnings 
management of 
companies listed at 
the Nairobi 
securities 
exchange 

Iraya et al. 
(2014) 

Kenya 

• To examine the 
effect of ownership 

concentration on 
earnings 
management 

• To examine the 
effect of board 
independence on 
earnings 
management 

• To examine the 
effect of board size 
on earnings 

management 

• To examine the 
effect of CEO 
duality on 
earnings 
management 

Quantitative 
research which 

collected 
secondary data 
from annual 
reports of listed 
firms (2010-
2012). The 
study sampled 
out 49 listed 
firms in NSE. 
Descriptive 
statistics, and 
linear 
regression 
analysis were 
adopted for 

analysis  

The findings indicated that 
ownership concentration,  

board size and board 
independence have negative 
effect on earnings 
management. This means 
they help in curbing earnings 
management. CEO duality 
was however found to have a 
positive effect on earnings 
management. In line with 
ownership structure, the 
study concluded that the 
majority shareholders keep to 
closely monitor day to day 
activities as they stand to lose 
massively should the 

management engage in any 
form of malpractice.  

Accrual-based 
versus real 
earnings 
management; the 
effect of ownership 
structure: 
Evidence from 
East Africa. 

Swai and 
Mbogela 
(2016) 
East Africa 

• To examine the 
effect of ownership 
concentration on 
accrual earnings 
management 

• To examine the 
effect of 

Institutional 
ownership on 
accrual earnings 
management 

 

The study 
collected data 
for the period 
from 2003 to 
2013 and 
adopted 
regression 
analysis to 
analyze data 
collected. This 
was on a sample 

of 44 non-
financial firms 
in East Africa. 
 

The findings indicated  
significant negative effect of 
ownership concentration and 
institutional ownership on 
earnings management. The 
study concluded that the 
majority shareholders are 
keen to effectively monitor  
corporate operations to 
ensure that their interests are 
well protected. The study 

however indicated the 
effectiveness of this control 
depends on their skills and 
experience.  

Ownership 

concentration and 
earnings 
management 
practice of 
Nigerian listed 
conglomerates 

Usman and 

Yero (2012) 
Nigeria  

• To examine the 

effect of ownership 
concentration on 
earnings 
management  

The study 

estimated panel 
OLS collecting 
data from 
annual reports 
of the 30 listed 
firms in Nigeria 
for the period 
from 2006-2010  

The findings indicated a 

negative effect of ownership 
concentration on earnings 
management. The study 
recommends that while high 
ownership concentration 
could see the interests of the 
minority shareholders  
disregarded, it is pertinent in 
that the shareholders keep 
close watch to the 
management.  

Ownership 
structure and 
earnings 
management: 
Empirical evidence 
from Vietnam 

Nguyen et al. 
(2021) 
Vietnam  

• To examine the 
effect of ownership 
concentration on 
earnings 
management 

• To examine the 

effect of foreign 
ownership on 
earnings 
management 

Multiple 
regression 
analysis  
Data; secondary 
data from listed 
firm’s annual 

reports.  
The study 
sampled out 489 
firms. 
Discretionary 
accruals were 
adopted as a 
measure of 
earnings 
management.   

Both managerial and foreign 
ownership has a negative 
effect on earnings 
management. In other words, 
they help in curbing earnings 
management. The study 

recommends firms to consider 
allotting shares to the top 
management as this aligns  
their interests with those of 
the company. They exercise 
due care in financial reporting 
as any misrepresentation 
would also adversely affect 
their stake in the entity.  
Foreign investors also come 
with diverse skills and 



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Topic  Author, Year, 
country  

Objectives  Methodology  Findings and 
Recommendations  

expertise critical for the 
growth of an enterprise far 
beyond fostering 
accountability and 
transparency in financial 
reporting.  

Managerial equity 
holdings and 
income smoothing 
incentives 

Shu and 
Thomas (2019) 
China 

• To examine the 
effect of 
Managerial equity 
holdings and 
income smoothing 
incentives.  

Regression 
analysis  
Deductive 
research 
approach and 
secondary data 
collected from 
the published 
annual reports 
(2009-2018) 

The findings indicated that 
managerial equity holdings 
help curb income smoothing. 
The study recommended that 
firms to consider allotting  
shares to top management.  
The share ownership helps  
align management interests  
with those of shareholders. 
The focus is to have the 

management focus at 
maximising shareholders’ 
wealth and not delving in 
earnings management which 
is at the detriment of the 
shareholders.  

Ownership 
structure and 
earnings 

management: 
Evidence from 
Portugal’ 

Alves (2012) 
Portugal  

• To examine the 
effect of 
Managerial 
ownership on 
earnings 
management  

• To examine the 
effect of ownership 
concentration on 
earnings 
management  

 

Multiple 
regression 
analysis on 

secondary data 
collected from 
the annual 
reports for the 
period from 
2002-2007. This 
was on a sample 
of 34 non-

financial listed 
entities in 
Portugal. 

The findings indicated that 
discretionary accruals as a 
proxy for earnings 

management is negatively 
related both to managerial 
ownership and ownership 
concentration. This means 
that both managerial 
ownership and ownership 
concentration help to curb 
earnings management. The 

study recommends that firms 
consider giving a proportion 
of ownership of the company 
to the top management to 
enhance their commitment 
towards effective 
management of shareholders’ 
wealth and to promote 
financial reporting quality.  
Coupled with ownership 
concentration, the cases of 
earnings management are 

bound to significantly 
diminish. The top owners are 
keen to effectively monitor  
the firm’s operations and 
financial reporting process 
and this minimizes chances of 
management manipulating  
earnings to attain selfish ends 

such as bonuses.  
Ownership 
structure and 
earnings 
management: 
evidence from 
Jordan 

Alzoubi (2016) 
Jordan  

To examine the effect 
of insider managerial 
ownership, institutional 
ownership, external 
blockholder, family 
ownership and foreign 
ownership on earnings 
management  

OLS and 
generalized 
least squares 
were adopted 
for analysis on 
data collected 
from the annual 
reports of 62 

firms quoted in 
Amman stock 
exchange. 
Discretional 
accrual was used 
a s a proxy of 

The findings indicated that 
insider managerial 
ownership, institutional 
ownership, external 
blockholder, family 
ownership and foreign 
ownership diminish cases of 
earnings management.  The 

study recommends that these 
distinct forms of ownership 
are not only critical in curbing 
earnings management but 
also in promoting diligence in 
investments and risk 
management. The study 



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Topic  Author, Year, 
country  

Objectives  Methodology  Findings and 
Recommendations  

earnings 
management 

recommends that investors 
should consider firms with 
institutional investors 
representation in the board as 
such deploy their experience 
and knowledge to protect the 
interests of all shareholders.  

The effect of the 
ownership 
concentration on 
earnings 
management. 
Empirical evidence 
from the Italian 
context 

Grimaldi and 
Muserra (2017) 
Italy  

• To examine the 
effect of ownership 
concentration on 
earnings 
management  

 

Multiple 
regression 
analysis of 
secondary data 
collected for the 
period 2011 to 
2013.  This was 
on a sample of 
300 non-

financial listed 
in Italy.   

The study findings indicated 
that ownership concentration 
has a negative effect on real 
earnings management. The 
majority shareholders are 
keen to effectively monitor  
corporate operations to 
ensure that their interests are 
well protected. However, the 

study concludes that high 
level of ownership 
concentration could see the 
interests of the minority 
shareholders disregarded.  

The relationship 
between equity 
ownership 
concentration and 

earnings quality: 
evidence from 
Brazil 

Sousa and 
Galdi (2016) 
Brazil  

• To examine 
influence of 
ownership 
concentration on 
earnings quality of  
Brazilian firms 

Regression 
analysis  
Data- secondary 
data from 

annual reports 
for the period 
from 1994-2014.  

The findings indicated an 
insignificant effect of 
ownership concentration on 
earnings management in 

listed entities in Brazil. This 
was in tandem with demand 
paradigm which holds that 
earnings are more reliable and 
consistent when the 
ownership is dispersed.  

Corporate 
governance, firm 
characteristics, and 
earnings 
management in an 
emerging economy 

Waweru and 
Riro (2013). 
Kenya  

• To examine the 
effect of 
Ownership 
structure, 
Independence of 
the Audit 
Committee and 
Board 
Composition) and 
firm specific 
characteristics 
(Firm size, Firm 
Performance, 
leverage) on 
earnings 
management by 
Kenyan listed 
firms. 

OLS regression 
analysis  
  
Earnings 
management- 
discretionary 
accruals.  
Data- secondary 
data from 
annual reports 
on a sample of 

37 listed firms 
in NSE, Kenya.  

All the components of 
corporate governance were 
found to curb cases of 
earnings management. For 
firm specific characteristics  
only, leverage was found to 
have a significant effect and 
specifically positive effect on 
earnings management. This 
means firms with high 
leverage are more likely to 

manipulate earnings.  The 
study recommends the need 
for a strong independent 
board and representation of 
institutional shareholders in 
the board to provide quality 
oversight to the management.  
The study further  

recommends a board with 
diverse skills and experience 
beyond having high 
ownership concentration and 
institutional investors. Such a 
board is able to put up strong 
internal controls that seal 
loopholes that are normally 
exploited by the management 
to manipulate earnings.    

The impact of 
corporate 
governance code 
on earnings 
management in 
listed non-financial 
firms: Evidence 

from Kenya 

Outa et al. 
(2017) 
Kenya  

• To examine the 
effect of corporate 
governance on 
earnings 
management  

Regression 
analysis on data 
collected for the 
period from 
2005 to 2014; 
338-firm annual 
observations.  

Corporate 
governance 

The findings indicated 
corporate governance as 
indicated by corporate 
governance Index (CGI) has  
no significant effect on 
earnings management.   
However, the study 

recommends the need to have 
an independent board with 



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Topic  Author, Year, 
country  

Objectives  Methodology  Findings and 
Recommendations  

index used as a 
proxy of 
corporate 
governance.  

requisite experience and skills  
to provide quality oversight 
to the management. Further, 
the study underscores the 
need for institutional 
shareholders to closely 
monitor corporate operations  

to quickly spot any 
incontinences in the financial 
reporting that could be a 
pointer to cases of earnings 
manipulation.  

Monitoring 
earnings 
management in 
emerging markets: 

IFRS adoption and 
ownership 
structure. 

Hessayri and 
Saihi (2015)  
United Arab 
Emirates, 

Morocco, 
South Africa, 
and the 
Philippines 

• To examine the 
effect of 
Ownership 
concentration on 

earnings 
management 

• To examine the 
effect of 
managerial 
ownership on 
earnings 
management 

• To examine the 
effect of 
Institutional 
ownership on 
earnings 
management 

Multiple 
regression 
analysis  
Secondary data- 

financial data 
from the annual 
reports of the 
sampled listed 
firms in UAE, 
Morocco, South 
Africa, and 
Philippines 

The findings indicated that 
ownership concentration,  
managerial ownership and 
institutional ownership are 

critical in curbing cases of 
earnings management. The 
study recommended listed 
firms to consider institutional 
investors with immense 
knowledge and experience in 
enterprise operations and 
financial reporting. There 
representation in the board is 
critical as they are able to 
closely monitor the corporate 
operations. 

Earnings 
management 
behavior in 

Malaysia: the role 
of ownership 
structure and 
external auditing 

Nor, 
Mahyuddin, 
Hashim, and 

Nahar (2020) 
Malaysia.  

• To examine the 
effect of 
institutional 
ownership on 
earnings 
management 

• To examine the 
effect of family 
ownership on 
earnings 
management 

• To examine the 
effect of family 
ownership on 
earnings 
management 

• To examine the 
effect of external 
audit on earnings 

management 

The study 
sampled 227 
listed firms in 

Malaysia and 
collected data 
for the period 
from 2001 to 
2016. 
Regression 
analysis was 
adopted to 

examine the 
effect of each of 
the study 
predictor 
variables on 
earnings 
management.  

The findings indicated that 
family ownership, managerial 
and institutional ownership 

help in mitigating earnings 
management. However, 
external audit function was 
found to have no significant 
effect in curtailing earnings 
management. The study 
recommended that 
corporations and 

shareholders should consider 
managerial ownership as this  
could reduce the control and 
monitoring costs as the 
management interests stands 
aligned to shareholders’ 
interests. However, the study 
recommended that 
institutional shareholders are 
still needed even in case of 
managerial ownership as the 
top management may still be 

motivated to manipulate 
earnings for short term gains 
such as immediate bonuses 
upon hitting set profit targets. 
With institutional investors 
and a strong and independent 
board, the firm will put up 
strong controls such as that 

an external audit may not 
even considerably mitigate 
earnings manipulation but 
just come to run audit tests to 
provide an assurance to 
shareholders.  



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Topic  Author, Year, 
country  

Objectives  Methodology  Findings and 
Recommendations  

Ownership 
structure and 
earnings 
management.  

Ekpulu and 
Omoye (2018) 
Nigeria 

• To examine the 
effect of 
managerial 
ownership on 
earnings 
management 

• To examine the 

effect of foreign 
ownership on 
earnings 
management 

• To examine the 
effect of 
institutional 
ownership on 
earnings 
management 

 

The study 
sampled out 75 
listed firms and 
collected data 
from annual 
reports for the 
period from 

2009 to 2014. 
Regression 
analysis, person 
correlation 
analysis and 
descriptive 
statistics were 
adopted for 
analysis.  

The study findings indicated 
that managerial ownership 
significantly curbs earnings 
management. However, 
institutional and foreign 
ownership were found to have 
an insignificant effect on 

earnings management.  The 
study concluded that with 
managerial ownership, the 
interests of the shareholders  
are protected as the 
management is also keen to 
safeguard their stake in the 
entity. The study indicated 
that even with institutional 
ownership, the management 
can still collude with 
accounting officers to bypass 

internal controls in the 
company. The study thus  
underscored the value of 
managerial ownership as one 
of the best solutions of agency 
problem and in mitigating  
earnings management.  

Ownership 
Structure and 
Earnings 
Management 

Alexander 
(2019) 
Indonesia  

• To examine the 
effect of ownership 
concentration on 
earnings 
management 

• To examine the 
effect of foreign 
ownership on 
earnings 
management 

• To examine the 
effect of 
institutional 
ownership on 
earnings 
management 

•  

The study 
focused on listed 
manufacturing 
firms in IDX 
and collected 
data for the 
period from 
2014-2016.  
Multiple 
regression 

analysis in E 
views was 
adopted for 
analysis.   

The findings indicated that 
institutional ownership and 
foreign ownership 
significantly mitigates  
earnings management while 
ownership concentration was 
found to have no significant 
effect in curbing earnings 
management. The study 
recommended foreign and 

institutional investors citing  
their skills and expertise 
critical in providing quality 
oversight to the management.  
This is through their  
representation in the board. 
The study however, 
underscored the need to have 
strong internal controls 
beyond just having  
institutional and foreign 
investors. The foreign and 
institutional investors should 
work towards ensuring that 
the firm has robust controls in 
place. But this can be 
overridden by collusion in the 
management and other 
company officers. This 
therefore calls for strong 
board to offer quality 
oversight.  

 

3. Research Methodology 
3.1. Introduction 

This chapter highlighted the research design, population and sample size, research variables, data collection 
and analysis techniques that would effectively examine the effect of ownership structure on earnings 
management.  
 
 
 
 



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3.2. Research Design 
This basically is the overall strategy adopted to integrate all research parts in a logical manner to effectively 

address the research aim and objectives. This research adopted a quantitative research design given that it 
entailed analysis of numerical data/quantitative data that was subjected to statistical analysis.  
 
3.3. Target Population  

The target population was 8 listed manufacturing firms in Nairobi securities exchange as at 2019. Panel 
data from the annual reports of the 8 listed manufacturing firms in NSE for a period of 10 years (2011-2019). 
 

Table 2. Research variables. 

 
The proxy for earnings management was discretionary accruals which was derived from the modified jones 

model expressed as: 

𝑁𝐷𝐴𝑡 = 𝛼1

1

𝐴𝑡 −1

+ 𝛼2

(∆𝑅𝐸𝑉𝑡 − ∆𝑅𝐸𝐶𝑡)

𝐴𝑡 −1

+ 𝛼3

𝑃𝑃𝐸𝑡

𝐴𝑡 −1

+ 𝜀𝑡 

 

∆𝑅𝐸𝐶𝑡 is the difference between the operating income of the previous year and the receivable items of the 

current year. 𝜀𝑡 is the residual sequence of the regression model, that is, the company’s discretionary accruals 

(𝐷𝐴𝑡). 
Discretionary accruals = Total accruals - non-discretionary accruals. 
The jones model was adopted to indicate the total accruals as follows; 

𝑇𝐴𝑡 = ∆𝐶𝐴𝑡 − ∆𝐶𝐿𝑡 − ∆𝐶𝑎𝑠ℎ𝑡 +  ∆𝑆𝑇𝐷𝑡 −  𝐷𝑒𝑝𝑡   
Where ΔCA is the change in current assets, ΔCL is the change in current liabilities, ΔCash is the change in 

cash and cash equivalent, ΔSTD is the change in current maturities of long-term debt and Dep is the depreciation 
and amortization expense. Changes in short-term debt are excluded from accruals because they relate to 
financing transactions as opposed to operating activities. 
 

4. Research Findings and Conclusion  
4.1. Descriptive Statistics  

Table 3 summarizes the descriptive statistics for the dependent variable, earnings management proxied by 
discretionary accruals.  
 

Table 3. Descriptive statistics- discretionary accruals. 
Year Mean Std. Deviation Minimum Maximum 

2011 -0.005 0.112 -0.991 0.061 
2012 -0.002 0.130 -0.970 0.068 

2013 0.007 0.062 -0.490 0.192 
2014 0.002 0.048 -0.380 0.252 
2015 0.003 0.046 -0.370 0.091 

2016 0.007 0.043 -0.321 0.154 
2017 0.003 0.142 -0.406 0.136 

2018 0.006 0.330 -0.342 0.204 
2029 0.008 0.023 -0.257 0.141 
Total 0.003 0.104 -0.503 0.144 

Variables Name Symbol Measure 

Dependent variables  

Earnings Management  Discretionary Accruals 
(DA) 

DA Non obligatory expenses that are not 
realised but have been recorded in the 
financial reports   

Independent variable 
Ownership Structure    institutional ownership IO Percentage of shares held by 

institutional shareholders to total 
company shareholding 

Managerial ownership MO percentage of shares held by top 
management to total company 
shareholding 

Ownership concentration OWNC Top 10 shareholder shareholding ratio 

Control variables  
Firm size  Fsize Log forms of total assets of the firm.   
Growth  GRW Percentage increase in annual sales   



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The mean discretionary accruals were found to be very low which indicated that the level of earnings 
management is insignificantly lower in the listed manufacturing firms in Kenya.  

Table 4 shows the descriptive statistics for independent variables.  
 

Table 4. Descriptive statistics; ownership structure. 

Year Mean/std. Deviation IO (%) OWNC (%) MO (%) 

2011 Mean 9.279 36.849 0.513 
Std. Deviation 1.965 5.898 2.671 

2012 Mean 9.249 37.038 0.733 

Std. Deviation 1.985 5.346 3.575 
2013 Mean 9.241 37.14 0.82 

Std. Deviation 1.924 5.085 3.506 

2014 Mean 9.125 36.986 1.109 
Std. Deviation 1.819 5.812 4.257 

2015 Mean 8.962 37.405 1.787 
Std. Deviation 1.796 5.844 5.958 

2016 Mean 9.04 37.027 1.608 

Std. Deviation 1.638 5.533 5.775 
2017 Mean 9.062 37.272 1.7 

Std. Deviation 1.729 5.393 5.783 
2018 Mean 9.048 36.95 1.691 

Std. Deviation 1.76 5.786 5.379 

2019 Mean 8.933 37.622 1.639 
Std. Deviation 1.692 6.055 5.195 

Total Mean 9.104 37.143 1.289 
Std. Deviation 1.813 5.638 4.843 

 
The mean institutional ownership in listed manufacturing firms was found to be 9.104%. This was a 

standard deviation of 1.813 which means that there is a statistically significant variation in the institutional 
ownership of listed manufacturing firms. Focusing on the trend, the institutional ownership slightly declined 
from 9.279% in 2011 to 8.933% in 2020. This could mean that institutional shareholders are possibly considering 
other sectors with potentially higher returns. However, extant studies notably (Nor et al., 2020) indicates that 
firms across all sectors continue to appreciate the value of institutional ownership. The institutional owners 
bring on board experience and knowledge which enhances the quality of oversight.  

The average managerial ownership in listed manufacturing firms was found to be 1.289%. This was a 
standard deviation of 4.843 which means that there is a statistically significant variation in the managerial 
ownership of listed manufacturing firms. Focusing on the trend, the managerial ownership rose from 0.513% in 
2011 to 1.639% in 2020. However, it is still relatively low despite that managerial ownership has been cited by 
Waweru and Riro (2013) as a disincentive to earnings management. This is given that it aligns the interests of 
shareholders with those of management as the latter also has a stake in the entity.  

This study findings further established the mean ownership concentration to be 37.143%. This was a 
standard deviation of 5.638 which means that there is a statistically significant variation in the ownership  
concentration across listed manufacturing firms. Focusing on the trend, the ownership concentration rose from 
36.849% in 2011 to 37.622% in 2020. However, it is still relatively low despite that managerial ownership has 
been cited as a disincentive to earnings management. Alves (2012) indicated that the level of managerial 
ownership could still be low in many firms given other approaches of incentivizing the top management such as 
bonuses and better pay.   

Table 5 presents the correlation matrix for all the variables in the study.  
 

Table 5. Correlation matrix. 

Variables DA MO IO OC FG FS 

DA 1.000 
     

MO 0.659 1.000 
    

IO -0.642 -0.943 1.000 
   

OWNC 0.502 0.565 -0.704 1.000 
  

GRW -0.401 -0.160 0.423 -0.620 1.000 
 

Fsize 0.788 0.922 -0.881 0.549 -0.361 1.000 
 
4.2. Correlation Analysis  

Firm size was found to have a significant negative correlation with ownership concentration. This is given 
a correlation coefficient of -0.881. Institutional ownership was found to have a significant negative correlation 
with managerial ownership. This could possibly mean that a rise in institutional ownership is bound to see a 
decline in managerial ownership. This is despite that it is expected that institutional investors are bound to 



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promote managerial incentives that align the management interests to their interests. These findings dissent 
with those of Alzoubi (2016) whose findings indicated a positive correlation between institutional ownership  
and managerial ownership. Alzoubi (2016) indicated that institutional owners opt for incentivized managers 
through such approaches as stock ownership to ensure that they remain focused on the core goal of maximizing 
shareholders’ wealth. Only firm size, though a control variable was found to have a significant positive 
correlation with discretionary accruals.  
 
4.3. Model Specification Tests  
4.3.1. Multicollinearity  

The study adopted variance inflation factor to test for multicollinearity.  Multicollinearity is bound to lead 
to biased results. Table 6 presents the variance inflation factors (VIF) for all predictor variables. 
 

Table 6. Multicollinearity test- variance inflation factor. 

Variable VIF I/VIF 

MO 4.203 0.238 
OWNC 2.319 0.431 

IO 3.081 0.325 
FSIZE 1.082 0.924 
GRW 4.048 0.247 

Mean VIF 2.947 
 

 
The VIF for all the variables were found to be below 5.0 depicting low level of multicollinearity. 

 
4.3.2. Test for Heteroscedasticity  

The CLRM assumes equal variance of errors, homoscedasticity. Conversely heteroscedasticity means that 
there is unequal variance of errors.  Deploying Breusch pagan test, the findings indicated a P value of 0.0791 
depicting absence of heteroscedasticity. This is given that the P value was higher than 5% significance level.  
Table 7 presents results ofc the Breusch test of heteroscedasticity.  
 

Table 7. Breusch pagan test of heteroscedasticity. 

Statistic Value 
Chi2(2)  5.07 

Prob>chi2 0.0791 
 

4.3. Regression Analysis 
The study deployed the random effects model and the results were as summarized in Table 8. 

 
Table 8. Random effects regression. 

Random effects GLS regression   Number of Obs. 76 

Group Variable: id  Number of groups 8 

R-sq:         Within                  0.0392  Obs per group: Min 6 

Between                                 0.0023  Avg 9.75 

Overall                                   0.0089  Max 10 
 

 Wald Chi2(3)  1.78 

Corr (U_i, x)                0 (assumed) 
 

Prob>chi2 0.8052 

DA                Coef.            Std err         Z          p>z       [95% conf.   
MO             -0.00174          0.0144 0.12     0.904          -0.0301   
IO                 0.0117            0.0392 0.3        0.766         -0.0652   
OWNC         0.0036           0.0041 0.86     0.388          -0.0045   
GRW           -0.00004         0.0006 0.07     0.941         -0.0011   
Fsize                0.0043             0.0027 1.58      0.115        -0.0010   

 
(The variables symbols are as indicated in Table 2- research variables (DA- discretionary accruals, MO- 

managerial ownership, IO- institutional ownership, OWNC- ownership concentration, GRW- firm growth, 
Fsize- Firm size). 

The study findings indicated that managerial ownership has no significant effect on earnings management 
as proxied by discretionary accruals. This was given a P value of 0.904 higher than the 5% significance level. 
The findings dissented with those of Nor et al. (2020); Hessayri and Saihi (2015) and Alzoubi (2016) which 
established that insider managerial significantly diminish cases of earnings management. Alzoubi (2016) 
indicated that managerial ownership is not only critical in curbing earnings management but also in promoting 



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diligence in investments and risk management.   However, it should be noted that there are other incentives 
such as bonuses and better compensation which could dissuade managers from engaging in earnings 
manipulation. 

The study findings indicated that institutional ownership has no significant effect on earnings management 
as proxied by discretionary accruals. This was given a P value of 0.766 higher than the 5% significance level. It 
should be noted that most important is the skills and capability of the majority shareholders to provide control  
and oversight over the management. Lack of requisite capacity to exercise control could still see instances of 
earnings management/manipulation. The findings agreed with those of  Sousa and Galdi (2016) which indicated 
an insignificant effect of ownership concentration on earnings management in listed entities in Brazil.  However, 
the findings dissented with those of Usman and Yero (2012) and Swai and Mbogela (2016) which established a 
negative effect of ownership concentration on earnings management. These studies held that majority 
shareholders keep to closely monitor day to day activities as they stand to lose massively should the management 
engage in any form of malpractice. However, this depends on their capacity to exercise control and oversight.  

The study findings indicated that ownership concentration has no significant effect on earnings 
management as proxied by discretionary accruals. This was given a P value of 0.388 higher than the 5% 
significance level. The findings however dissented with most previous studies such as Swai and Mbogela (2016); 
Alzoubi (2016) and Hessayri and Saihi (2015) which established a significant negative effect of institutional 
ownership on earnings management. This is holding that institutional investors come with experience critical  
in offering quality oversight over the management of the firm. However, the findings of this study indicated low 
level of discretionary accruals which means that this may not be a significant issue for the listed manufacturing 
firms.  

The two control variables (firm growth and size) were found to also not have any significant effect on 
earnings management.  
 

5. Conclusion and Recommendations  
5.1. Conclusion  

The main aim of this study was to examine the effect of ownership structure on earnings management.  A 
review of literature indicated that ownership structure as a component of corporate governance is critical in 
curbing instances of earnings management in listed entities across the globe. The main components of ownership  
structure studied included ownership concentration, managerial ownership, and institutional ownership.  The 
study findings established that managerial ownership, institutional ownership and ownership concentration 
have an insignificant effect on earnings management. Theoretically managerial ownership is expected to align 
the interests of the management to those of the shareholders. The management work towards that which will 
be beneficial to all shareholders as any deviations could also adversely affect their wealth. This is especially that 
previous cases of earnings management that have been unearthed have adversely affected shareholders’ wealth. 
However, the findings established that managerial ownership has no effect on earnings management.  

While institutional ownership has been cited to be critical in curbing cases of earnings management due to 
the experience and knowledge of institutional investors, the study established institutional ownership has no 
significant effect on earnings management. It has been held that the institutional investors are able to promote  
robust internal controls that help to seal loopholes that could be exploited by the management to manipulate 
earnings. In summation, ownership structure was found to have no significant effect on earnings management.  
 

5.2. Recommendations 
While all the components of ownership structure were found to have no significant effect on earnings 

management, their importance cannot be overlooked. However, they need to complemented by other core  
components of corporate governance notably board independence and avoiding instances of CEO duality. Most  
pertinent is to ensure that proper internal controls are put in place to seal loopholes that  could be exploited by 
the management to manipulate earnings.  
 

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http://www.theeastafrican.co.ke/tea/news/east-africa/kenya-firms-post-false-company-results-study--1316672
http://www.theeastafrican.co.ke/tea/news/east-africa/kenya-firms-post-false-company-results-study--1316672
http://www.forbes.com/sites/ywang/2020/04/10/china-stocks-face-increased-scrutiny-after-tal-education-and-luckin-coffee-reveal-inflated-sales/?sh=37df69cd51b2
http://www.forbes.com/sites/ywang/2020/04/10/china-stocks-face-increased-scrutiny-after-tal-education-and-luckin-coffee-reveal-inflated-sales/?sh=37df69cd51b2

