Multivariate results .1 Test of hypothesis 1

220 suggest that there is no systematic relationship between the ownership and real earnings management. Insert TABLE 6 about here SIZE, MTB, and NI were significantly negative in all models, which is consistent with the expectations discussed earlier.

5.2.2 Test of Hypothesis 2

When we tested hypothesis 1, we found no systematic relationship between the majority shareholders‘ ownership and real earnings management. However, majority shareholders have differential incentives in monitoring real earnings management if their sensitivity to real earnings management related to future performance is different as the prospect theory assumed. That is, monitoring by majority shareholders may only be effective in the upward earnings management bracket since it causes low operating performance in the future unlike downward real earnings management. Thus, to test hypothesis 2, we investigated the effects of the majority shareholders ‘ ownership on real earnings management according to earnings management incentives. TABLE 7 shows the results of the test of hypothesis 2, and confirms that the results can differ according to their incentives. Insert TABLE 7 about here Hypothesis 2a refers to EM1, which includes companies with upward earnings management incentive. All the coefficients of EM1 were significantly positive, and Eε1×OWNH was significantly negative correlated with REε. This result was consistent across the ACFO, APC, and ADE models. Positive sign of EM1 indicates that these 221 companies practice upward real earnings management to avoid deficits. In addition, negative sign of Eε1×OWNH suggests self-control of real earnings management when the majority shareholders‘ ownership is high. In other words, majority shareholders resist making a decision that will decrease the company‘s long-term value. This result supports the convergence-of-interests hypothesis i.e. the interests of the majority shareholders and those of the minority shareholders are convergent Jensen and Meckling, 1976; Klassen, 1997. Hypothesis 2b refers to EM2, which includes companies with downward earnings management incentive. All the coefficients of EM2 were significantly negative, but none of the Eεβ×OWNH variables was significantly correlated with REε. This implies that downward real earnings management occurs regardless of whether the majority shareholders‘ ownership is high or not. We interpret this result as evidence that majority shareholders do not feel the need to block downward real earnings management because it does not damage long-term operating performance. When compared to upward real earnings management, this result is congruent with the prospect theory illustrating that investors including majority shareholders are more interested in evading loss than in pursuing profit. Hypothesis 2c refers to EM3, which contains companies without obvious earnings management incentive. The signs of EM3 in TABLE 7 are not consistent across models, and most of them are not significant. Furthermore, none of the Eεγ×OWNH variables was significant. This result indicates that companies with large losses do not conduct real earnings management consistently, and the monitoring for real earnings management of majority shareholders is not apparent regardless of their ownership level. 222 The control variable results are similar to those obtained when testing hypothesis 1; negative signs in all models. That is, real earnings management decreases when firms are larger, growth opportunities are greater, and operating performance is better.

5.3 Additional analysis

The aim of this study was to examine the effect of majority shareholder ownership on real earnings management. We classified the types of earnings management into separate brackets and determined that upward earnings management incentives shrink when majority shareholder ownership was high. This result suggests that the higher the proportion of majority shareholders the more th ey are interested in a firm‘s long-term performance. Furthermore, we performed an additional analysis to assess the impact of the proportion of majority shareholders on a long-term performance using the accumulated ROA from year 1 to year 5, as shown in TABLE 8. Since real earnings management has an impact on long- term performance, we expect to see a discrepancy in firm‘s performance between high and low majority shareholder ownership groups. Insert TABLE 8 about here TABδE 8 shows the differential impact on the firm‘s future performance in each earnings management bracket according to majority shareholder ownership. First, EM1 is significantly negative across all years i.e., year 1 through 5, indicating that earnings management for loss aversion results in negative future ROA. On the other hand, Eε1×OWNH is significantly positive from the year γ through year 5. This result implies that a higher ownership of majority shareholders plays a significant role in monitoring 223 management not to impair long term operating performance although upward earnings management incentives present. Second, in the bracket of EM2 reflecting downward real earnings management, Eεβ are significantly positive while Eεβ×OWNH are not significant in all period. This result suggests majority shareholders with higher ownership are not interested in as much downward as upward real earnings management. This may be because downward real earnings management in fact improves future operating performance. Third, Eεγ are significantly negative and Eεγ×OWNH are significantly positive across all time periods. This result also suggests that majority shareholders with higher ownership keep management from acting detrimental to future performance. The results together imply that majority shareholders with higher ownership effectively control their managers not to implement myopic management decision that is harmful to future performance, confirming the hypothesis of convergence-of-interests between majority and minority shareholders. In particular, majority shareholders‘ asymmetric role across different earnings management incentive brackets may come from their loss aversion and is consistent with the prospect theory.

VI. CONCLUSIONS AND LIMITATIONS

To examine the convergence-of-interests or the expropriation-of-minority- shareholder hypotheses, this study adopted real earnings management instead of prior studies‘ accruals-based earnings management. Although majority shareholders allow accruals-based earnings management even with greater ownership, they may be more careful to real earnings management. It is because real earnings management has more direct influence on firm‘s actual operating performance. Thus, conclusions just with accruals-based earnings management may be so weak that we utilize real earnings management to test this controversial issue.