Effect Of Managerial Ownership On The Quality Of Earnings Forecasts

Management earnings forecasts concern about the company’s future performance. They are predictable information. Management earnings forecasts require subjective judgment, so they are vulnerable to be manipulated. Earnings forecasts are made by the management. The features of management have a critical influence on the quality of management earnings forecasts. In modern companies, shareholders have the ownership of the listed company and the management has the right to operate the listed company. The relationship between shareholders and management is principal-agent relationship. On one hand, the goals shareholders and management pursued respectively are likely to be different. On the other hand, management has more information about the company than shareholders do. This is because management have the advantages of positions. Information disclosure of the listed company should be to reduce the information asymmetry and to enhance the fluidity of the company’s stocks and to protect the interests of small investors at the same time. However, management may manipulate the information disclosure, so that they can achieve some self-serving purposes. At this time, information disclosure can enhance the information asymmetry instead and become the tool of information fraud. Managerial ownership is an important means to alleviate the agency conflict. The interests of management and shareholders are become same partly because of management holdings. In this case, whether the management still manipulate the information disclosure? It has some theoretical and practical significance to think about this problem.In this paper, the author analyzed the effect of managerial ownership theoretically. And then test the relationship between management ownership and the quality of management earnings forecasts in the listed company. We analyzed the principal-agent theory and reviewed the relevant literature on management ownership and management earnings forecasts at home and abroad. Combined with China’s actual conditions, we using ordered logistic model and nonlinear regression model examined the effects between management ownership and the quality of management earnings forecasts in all the A-share listed companies between the2010and2012. At last the author got some reliable conclusions. This paper is divided into six parts. The first part is the introduction which contains the background, the purpose and the contributions. The second part is the review of the literature at home and abroad. It includes the researches on managerial ownership and management earnings forecasts. The third part is the theoretical analysis and hypotheses proposed. This part introduced Agent theory and Asymmetric information theory and Signaling theory. Then author made two hypotheses about this study. The fourth part introduced the model of the study and the data sources and described the measurement of relevant variables. The fifth part is the process of empirical test and the process of analyzing. We examined whether managerial ownership has an significant effect on forecasts’accuracy and precision. The sixth part is a summary of the empirical results. We also analyzed the shortcomings of this article and put forward some suggestions in future. research.Through analysis, the quality of management earnings forecasts can be divided into two aspects:precision and accuracy. First, from the aspect of precision, the precision in the listed companies where the management do not hold shares is higher than that in companies where the management hold shares no matter the message disclosed in earnings forecast is good or bad. From the perspective of accuracy, the situation is the same. These suggest that managerial ownership has a positive effect. Secondly, in the case of managerial ownership, the relationship between management ownership and quality of earnings forecasts is a kind of non-linear inverted U-shaped relationship. When the proportion of managerial ownership is low, the accuracy of earnings forecasts changes like the proportion changes. When the proportion of managerial ownership reaches a high stake, so that management can absolutely control the listed company. At this time, the accuracy of earnings forecasts decreases while the proportion increases. This suggests that high managerial ownership has some negative effects. Overall, management ownership does have incentive effects which can promote the management to improve the quality of information disclosure, but this positive effect is limited to the lower level of shareholding, once the level of shareholding become too high, the management can completely control the company. In this case, the information disclosure will to be manipulated by management and become a tool to achieve personal interest.Therefore, in order to standardize the information disclosure of listed companies to ensure the quality of information disclosure, it is necessary to award management with some stock options. But it should be controlled in the moderate range so that can maintain a reasonable shareholding structure. Meanwhile, security regulators should also strengthen the supervision and develop some effective measures to publish violations.There are some deficiencies due to the limitations of subjective and objective conditions. First, the managerial ownership is more complex in China’s market. The reliability of this study is not much high. Second, we only used the first time earnings forecasts to do the study and ignored the revise of the earnings forecasts. In the future research, we can do some thing to make up those shortcomings. First, the management should be defined more reasonably and appropriately in order to get more reliable conclusion. Second, doing some study on the time of information disclosure and the revised earnings forecasts is meaningful.