Impact of Financing Behaviors on Firm Financial Performance: The Moderating Influence of Earnings Management

Abstract

The study investigates the relationship between ownership structures, governance mechanisms and firm financial performance with a special emphasis on the moderating effect of earnings management. These results indicate that IO and MO, through their presumed roles in aligning the interests of managers and shareholders, substantially contribute to improved firm performance. Conversely, the negative interaction effect between ownership concentration and earnings management suggests that high levels of ownership concentration can cause managerial entrenchment, leading managers to use personal interests rather than shareholders as a basis for decision making, and thus reduce firm performance.
The results show the significant effects of firm size and audit committee on the performance. Specifically, firm size is positively related to firm performance, consistent with the Resource Based View (RBV), which suggests that larger firms with more resources are now in a more advantageous financial situation. Despite the presence of an audit committee, return on assets (ROA) is negatively correlated with governance mechanisms, implying that governance systems might need to be customized to fit in with the firm’s larger strategic objectives so as to improve financial performance. These findings are based on Agency Theory which emphasizes how ownership structures can discipline agency costs. I show that both institutional and managerial ownership align the interest of managers and shareholders improving firm performance. Nevertheless, the interactive effects with earnings management indicate that when earnings manipulation occurs together with ownership concentration, agency problems increase, and the level of performance is suboptimal. The positive relationship between firm size and ROA supports the Resource Based View (RBV), that is, firms with greater resources are able to garner greater profitability. This work makes important theoretical and practical contributions to the literature on governance mechanisms and ownership structure for firms and investors that wish to optimize their control mechanisms in order to achieve better long-term financial performance.