The Effect of Shareholder Rights on Earnings Quality

Abstract

Using panel data analysis, this paper examines the effect of shareholder rights (as an external corporate governance mechanism) on the quality of reported earnings of Iranian firms. We used a sample comprised of 145 publicly traded firms listed in Tehran Stock Exchange (TSE). Shareholder rights features considered are ownership concentration, control right, government shareholding, transaction with affiliated firms, and legal lawsuits. In contrast to prior literature, shareholder rights features are defined as a multidimensional variable. Further, the present study measures the quality of earnings in seven ways. After controlling for firm size, leverage, operating cash flows, and growth opportunities, Empirical tests demonstrate that the overall shareholder rights measure is 1) negatively related to the earnings persistence, earnings management and conservatism, 2) positively related to the earnings timeliness, and 3) not related to the accrual quality, earnings predictability and value relevance. Furthermore, our results suggest that disaggregating overall shareholder rights measure into more components cause to variability in explanatory power of the models.

Keywords

• Earnings Quality
• Corporate Governance
• Shareholder Rights
• Measure