The Interaction Effects of Firm Value, Managerial Ownership Retention, Earnings Forecasts and Earnings Management

Abstract

This study examines the signaling and non-signaling effects of direct disclosure of expected earnings and managerial (insider) ownership in a comprehensive framework. Market valuation and cost reduction aspects of signaling are explored along with non-signaling aspects of earnings management, alignment effect, and value effect. The empirical results suggest that the market positively reacts to earnings forecast and insider ownership and earnings forecast and insider ownership substitute each other for the least costly combination. The results also show that earnings forecast positively affects the extent of earnings management to reduce signaling cost, while insider ownership does not. Regarding non-signaling aspects of insider ownership, it is shown that firm value positively affects insider ownership. However, insider ownership is not found to significantly affect firm value either positively or negatively. Also, insider ownership is found to lessen the extent of earnings management only at high ownership levels.