Ownership Structure and Earnings Management: Empirical Evidence from Listed Pharmaceuticals and Chemical Firms of Bangladesh

Objective – This study aims to examine the relationship between ownership structure (determined by institutional and foreign ownership) and earnings management in the context of Bangladeshi Pharmaceuticals and Chemical firms. Methodology/Technique – Out of 32 listed firms, this study examined 29 firms from the pharmaceuticals and chemical industry of Bangladesh from 2014 to 2018. Three firms are omitted as they got listed in 2018 and 2019 respectively. This study uses discretionary working capital accrual to measure earnings management that is the dependent variable. Ordinary least square regression analysis is conducted to assess the result of this study. Institutional and foreign ownership are independent variables. ROA, size, cash flow from operation, and leverage are control variables. Findings – It is found that institutional ownership is negatively related to earnings management and foreign ownership is positively related to earnings management but none of them are statistically significant indicating institutional and foreign ownership do not help in resolving or reducing the earnings management problems in the context of Bangladeshi pharmaceuticals and chemical firms. Novelty – Previous studies in Bangladesh deal only with the techniques of earnings management. To my knowledge, it is the first study that tries to assess the relationship of ownership structure defined by institutional and foreign shareholdings with earnings management in the context of Bangladeshi pharmaceuticals and chemical firms. These two ownership patterns are selected because they are supposed to increase the quality of financial information and also because in Bangladesh state and general shareholders are too dispersed to monitor the governance issues. The practical implications of this study is that investors should not consider institutional and foreign ownership percentage as a determining factor of good governance when considering investment decisions rather should look for other firm-specific factors as institutional and foreign shareholders are found to be inactive in increasing the quality of financial information in the context of Bangladesh. Policymakers should identify why institutional and foreign shareholders are not active and should revise the governance mechanisms accordingly. Type of Paper: Empirical Keywords: Ownership structure; Institutional Shareholdings; Foreign Shareholdings; Earnings Management; Bangladesh. Reference to this paper should be made as follows: Hossain, D.A. 2020. Ownership Structure and earnings management: Empirical evidence from listed pharmaceuticals and chemical firms of Bangladesh, J. Fin. Bank. Review, 5 (2): 58 – 69 https://doi.org/10.35609/jfbr.2020.5.2(3) JEL Classification: G40; G41; G49.