Mediating Role of Earnings Management in the Association between Ownership Structure and Firm Performance: Evidence from Thai IPO Firms

Abstract

This research aimed to study: 1) the association of ownership structures on earnings management and firm performance in the pre-IPO year, 2) the impact of changes in ownership structure on earnings management and firm performance during and after the IPO year, and 3) the mediating role of earnings management in the association between ownership structures and firm performance. Firm performance was assessed based on the accounting performance measured by return on assets (ROA) and return on equity (ROE). Earnings management was evaluated using two measures: real earnings management ( REM) and accrual- based earnings management ( AEM) . Ownership structures, including ownership concentration and managerial ownership, were considered. The samples consisted of 72 firms listed on the Market for Alternative Investment (MAI) from 2012 to 2017. The statistical methods used to analyze the data included multiple linear regression and Baron and Kenny’s method (1986) for analyzing mediation hypotheses. The results indicate that ownership concentration has no association with earnings management and firm performance during the IPO period. This implies that the largest shareholders do not directly influence the earnings management and the company performance, both before and after the IPO. This could be because companies encounter stricter reporting requirements and greater regulatory scrutiny during the IPO phase, limiting the influence of large shareholders on the company financial results and strategies. However, the analysis demonstrates that in the pre- IPO year, higher managerial ownership is associated with improved operating performance and reduced REM behavior. This aligns with the alignment hypothesis, which reduces agency costs and mitigates executive misconduct (REM) behavior helping businesses achieve better operational results. The mediation analysis provides additional insights, showing that REM fully mediates the relationship between managerial ownership and ROA, while partially mediating the relationship between managerial ownership and ROE. However, after the IPO, the retention of managerial ownership does not show a significant relationship between earnings management and firm performance. REM no longer serves as a mediating variable. These findings illuminate changes in ownership structure during the transition from private to public companies. The decline in managerial ownership following the IPO clearly highlights the potential loss of control and influence, which impacts the practices of earnings management and operational efficiency, as stated in the agency theory. This study contributes valuable and significant perspectives to the existing body of research concerning ownership structure, earnings management, and firm performance. It enhances the comprehension of these dynamics for policymakers, investors, and market stakeholders. However, it is important to acknowledge that this study focuses on MAI in Thailand, which might restrict the applicability of the results. Consequently, it is highly recommended that additional research be conducted in various markets and situations to broaden the scope of understanding.