The impact of director blockholders on abnormal accruals and inventory

Abstract

This paper empirically analyzes the impact that director blockholders have on earnings management. We argue that having a blockholder serve on the board of directors will improve a firm's corporate governance due to having both the ability and incentive to correct problems in a firm. We provide evidence that the presence of blockholders on the board of directors lowers the amount of abnormal working capital accruals caused by CEO incentives. We show that this is primarily done by reducing abnormal increases in inventory. This finding is most robust among busy boards, providing evidence that director blockholders can provide strong corporate governance in the absence of an attentive board of directors. Our findings suggest that director blockholders can provide an important role for firms and may prevent managers from taking value-destroying actions.