Control-Enhancing Mechanisms and Earnings Management: Empirical Evidence from Pakistan

Separation of ownership and control plays a significant role in determining the agency cost, and there are many consequences of this agency problem. The control-enhancing mechanisms enhance control of controlling shareholders who expropriate small shareholders. Controlling shareholders are different in different countries; majorly, family firms are controlling firms in Pakistani context. The use of control-enhancing mechanism is rampant in emerging economies, and even some developed countries, related research especially in Pakistan requires evidence. This study exhibits a pooled cross-sectional analysis of listed companies in Pakistan between 2005 and 2016. In this research, we have examined the influence of control-enhancing mechanisms on firms’ earnings management and which mechanism (pyramid control, multiple control chains, and cross-holding control) is significantly influencing the earnings management of firms. We have analyzed both types of earnings manipulation techniques (accrual and real earning management). Our results explicate that the pyramid control and multiple control chain mechanisms are significantly positively related to the accruals earning management and real earnings management, unveiling that firms with these controls manipulate earnings with discretionary accruals as well as with real activity manipulation. Real activity manipulation enhances firms to overproduce the inventory (decreasing the unit price) and to reduce the discretionary expenses (increasing the reported earnings).

Family Firms and the Choice of Payment Method in Domestic and International Acquisitions

This paper investigates the impact of family control on domestic and international acquisition’s payment. This effect is important to understand since it will underpin all the future financial flexibility of the merged firms in a context of accelerating international market integration. We find that the percentage of cash payment in acquisitions is positively associated with family voting rights, but we highlight that family wedge is negatively associated with cash payment, which indicates the important role of control-enhancing mechanisms. Dilution risk is crucial at an intermediate level of control, since this relationship is nonlinear. Moreover, we show that both unused debt capacity and the increase in debt capacity are used by family firms to finance the relevant deals, but that these firms become overleveraged after merging, losing some financial flexibility in exchange for equity control purposes.

Pyramid groups and firm performance: empirical evidence from Canadian corporations

Using data of Canadian corporations in 1994 and 2003, this study analyzes whether controlling shareholders of corporate pyramid groups, with substantial divergences in ownership and control, negatively or positively impact firm performance. We find some evidence that the combination of ownership concentration and pyramidal structure would lead to inferior firm performance and valuation, but little evidence concerning tunneling within groups. We argue the robust legal environment in Canada that encourages shareholder value maximization could mitigate the negative impact of control enhancing mechanisms on minority public investors.