Impressions of agency: An investigation into the influence of investor capitalism on earnings management

The dissertation utilizes the principles of agency theory and impression management in gaining a better understanding of ownership structure and its role in earnings management as an image-enhancing activity. Driving this dissertation is the research question: How does investor capitalism influence the propensity of organizations to engage in earnings management? To answer this question an archival-based research project was conducted. Data were collected on a matched sample of 870 cases, half of which were determined to have engaged in earnings management activity. Logistical and multiple regression statistical procedures were used to analyze the data and test a series of hypotheses. The results suggest that a higher degree of institutional ownership increases the likelihood of an organization's management engaging in earnings management. Findings also indicate that prior success in earnings growth and in comparative stock returns moderate the relationship between institutional ownership and earnings management. While ownership structure contributed to the degree of reliance on CEO outcome-based contracts, there was a lack of support for the assertion that these contracts influenced the likelihood of an organization's management engaging in earnings management. These results suggest that investor capitalism contributes to an environment in which agents who are aware of principal expectations engage in earnings management in order to enhance their image.; The findings make a contribution to agency theory by pointing out that ownership structure may actually work to foster an environment conducive to earnings management. The findings further contribute to agency theory by the suggesting a nonlinear relationship between the separation of ownership and control rather than the traditional view of linear variability. A contribution is made to the study of impression management by demonstrating that prior successful performance contributes to image-enhancing activities. The study contributes to corporate governance research by calling into question the effectiveness of outcome-based contracts as a governance mechanism. Earnings management benefits from an alternative methodology for isolating the activity and by adding to the limited structural level research on the topic.