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Inside Blockholders, Outside Blockholders, and Accruals Quality
Feng Chen, University Of Toronto
Mary S Stone, University of Alabama
Lin Zheng, Mercer University
ABSTRACT. This paper investigates the relation between block ownership and accruals quality. We model outside blockholdings, inside blockholdings, and levels of discretionary accruals as part of a joint endogenous system. Consistent with the entrenchment effect, larger inside blockholdings are associated with lower quality of financial information after controlling for the monitoring role of large outside blockholders. In particular, inside blockholdings are positively associated with income-increasing discretionary accruals. We also find that outside blockholders exhibit differential monitoring intensity conditional on firm-specific monitoring costs. Taken as a whole, our analyses suggest that while higher outside blockholdings could potentially mitigate opportunistic financial reporting behavior, it is important to maintain diversified blockholdings. The results are robust to concerns of endogeneity and outliers, and to an alternative measure of accruals quality.
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