Do political connections moderate the nexus between ownership structure and real earnings management?

Abstract

This study examines the moderating effect of political connections on the relationship between ownership structure and real earnings management (REM) among Malaysian listed non-financial companies. Drawing on agency theory, the study investigates whether ownership mechanisms—namely managerial ownership, blockholder ownership, and family ownership—effectively constrain managerial opportunism, and whether political connections influence this relationship. While ownership concentration is generally expected to align managers' and shareholders' interests, political connections may weaken governance effectiveness by reducing external monitoring and regulatory scrutiny. Using a sample of 850 firm-year observations from 2012 to 2016, the study employs regression analysis to test both direct and moderating relationships. The results show that managerial ownership, blockholder ownership, and family ownership are negatively associated with REM, indicating that these ownership structures are effective in limiting real earnings manipulation. However, further findings reveal that political connections significantly weaken this relationship, suggesting that politically connected firms may have greater flexibility to engage in opportunistic reporting behaviour despite the presence of internal governance mechanisms. This study contributes to the literature by highlighting the conditional role of political connections in shaping the effectiveness of ownership-based governance. The findings have important implications for regulators and policymakers seeking to strengthen governance frameworks and mitigate unethical financial reporting practices, particularly in emerging market settings.