The Relationship between Managerial Ownership and

Firm Performance Mediated by Real Earnings Management of

Thai IPO Firms

Rajamangala University of Technology Thanyaburi,

Thanyaburi, Pathum Thani, 12110,

THAILAND

Abstract: - This study aims to examine the effect of managerial ownership on firm performance, both directly and

through real earnings management as a mediating variable, during the pre- and post-initial public offering (IPO)

years. Thai quoted companies on the Market for Alternative Investment (MAI) between 2012 and 2017 are

analyzed. The findings reveal that before the IPO year, higher managerial ownership exhibits a positive association

with firm performance, and this relationship is fully mediated by real earnings management. However, after the

IPO, managerial ownership no longer significantly affects firm performance, and real earnings management acts as

a mediating variable. These findings highlight the changes in ownership structure during the transition from private

to public companies. The decline in managerial ownership post-IPO strongly suggests a potential loss of control

Key-Words: - managerial ownership, real earnings management, return on assets, initial public offering, Market for

Alternative Investment, Thai firms.

Received: May 9, 2022. Revised: August 13, 2023. Accepted: September 14, 2023. Available online: October 19, 2023.

An initial public offering (IPO) is a crucial aspect for

a company to undertake as it transitions from private

to public ownership, enabling it to raise capital and

while regulatory requirements can impose burdens on

management executives, potentially leading to a

decline in their motivation to do the right thing, [1].

Extensive research consistently demonstrates that

IPOs are associated with stock prices and operating

underperformance. Several factors contribute to these

outcomes, including pre-IPO earnings management

by the issuing firm, [2], [3]. As well as the departure

of ownership and control following an IPO, which

leads to rising agency costs, [4], [5], [6], [7]. The

ways that primarily benefit themselves, disregarding

the interests of investors. Such decisions can create

conflicts with investors' interests, resulting in agency

problems as defined by Jensen and Meckling. To

address these challenges, it is crucial to design

effective control mechanisms in corporate

governance and finance to align managerial actions

with shareholder interests, [8]. This helps ensure

reliable and comprehensive financial reporting takes

place, [9]. Well-structured corporate governance

earnings management, [10], [11].

Previous research has explored the link between

ownership and business performance in the scenario

of companies going public. For example, [4],

detected a statistically significant and positive

association between firstly, operating performance

following an IPO and secondly, the level of equity

retained by the original entrepreneurs. In, [12], the

author discovered that during the post-IPO period,

lower levels of insider ownership were related to a

which is considered risky as it can be easily detected

by auditors. As a result, managers may resort to real

earnings management when they fail to meet desired

earnings, [13]. Some studies have emphasized the

significance of real earnings management in

achieving IPO objectives. For instance, [14], found

that IPO firms reducing their research and

development (R&D) expenses had less insider

ownership and higher IPO valuations. This aligns

with the observations of, [15], who discovered a

increasing levels of retained ownership are related to

reduced manipulation of real earnings. Similarly,

[17], conducted a study revealing that issuer parties

are involved in real earnings management around the

lock-up expiration period. It is possible that this is

driven by pre-IPO shareholders’ selling incentives.

According to a review of the relevant literature,

most studies have primarily focused on examining

the direct effect of managerial ownership on firm

performance after an IPO. However, as of now, there

is no clear consensus on this matter. Therefore, the

purpose of this study is to investigate both the direct

effect of managerial ownership on firm performance

and its influence, mediated through the variable of

investors, and market participants.

The following descriptive intends to explain the

research paradigm, which is agency theory. Also, a

literature review relating to firm performance during

IPO periods, real earnings management, and

ownership structures is explained. Finally,

managers of the company. However, as the firm

grows larger, it requires additional capital to finance

its operations. Consequently, the firm sought external

funding from the market, leading to the involvement

of other investors who provided funds and acquired

ownership shares alongside the existing owners. This

dispersal of ownership resulted in the appointment of

operations, leading to ownership and control

becoming separated. This, in turn, can lead to

objectives, which may very well guide how well a

business practices to deceive or mislead stakeholders

into expecting that certain financial goals have been

achieved through regular operations and procedures.

Managers preferred real earnings management

strategies because they were less scrutinized by

auditors and regulators compared to accrual-based

methods. Relying solely on accrual manipulation was

seen as risky, prompting managers to turn to real

earnings management when desired earnings were

not met, [13]. Referring to real earnings

[24], [25].

Previous research has examined the association

between IPOs and real earnings management.

According to, [15], indicated IPOs decline R&D

expenditures in the IPO year to inflate earnings. This

reduction was driven by managers' desire to sell

shares, as they resisted investors considering current

earnings. In, [26], the author discovered that IPO

companies were involved in real earnings

management practices throughout the IPO year, with

poorer post-IPO survival rates.

operations. According to, [19], argue that substantial

management stakes rarely engage in activities that do

not benefit the company since they bear the costs in

proportion to their shareholdings.

However, currently published analyses on the

association between ownership structure changes and

firm performance during IPOs produced limited and

inconclusive findings. In, [12], the authors

discovered a negative relationship between

alterations in the level of insider shareholders and

companies on the SET and noted that the

relationships between performance and managerial

ownership varied based on the level of ownership.

Businesses characterized by low and high managerial

ownership indicated positive associations (supporting

the alignment-of-interest hypothesis), while those

featuring intermediate ownership levels exhibited

negative associations (supporting the entrenchment

hypothesis). In their analysis, nevertheless, [1],

detected no relationship between changes in directors

firms may reduce their R&D expenditure to align

with managerial share sales objectives. In, [14], the

authors discovered a relationship between curtailed

R&D spending in IPO firms and a smaller proportion

of insider ownership. The results suggest that IPO

companies with less insider ownership tend to be

involved in real earnings management practices by

reducing R&D expenses. Supporting these insights,

[29], found a negative relationship between retained

shareholders and real earnings management in IPO

management in the years following the IPO,

particularly around the lockup expiration period.

They proposed that this behavior could be related to

the selling motivations of pro-IPO shareholders.

Based on the above literature review, we can

posit the following hypotheses:

extensive research has provided evidence indicating

studies have documented instances of earnings

management during IPOs to attract investors, [3],

[32], [33]. This behavior is primarily driven by the

information asymmetry that is evident between

issuers and investors. Furthermore, the shift from

private to public ownership via IPOs triggers changes

in the shareholder structure, resulting in a separation

of controls, management, and ownership. A change

motivation and has strong ramifications for the

Hypothesis 5: Real earnings management mediates

This study scrutinizes the link between managerial

ownership, earnings management, and IPO

performance. To ensure the up-to-date nature of the

empirical evidence and minimize the influence of the

COVID-19 pandemic, a thorough analysis was

conducted using a preliminary sample of 83 initial

company prospectuses and annual reports, was from

the online database of the Thai Securities and

Exchange Commission, covering the period from

2010 to 2018. To enhance the reliability of the

findings, financial industry companies were excluded

from the study to eliminate the potential influence of

unique working capital structures and additional

regulatory governance, aligning with

recommendations from previous studies, [36].

Incomplete and outlier data were carefully deleted,

resulting in a final sample size of 72 companies.

The primary data analysis technique employed in this

study was multiple linear regression. Feasibility tests,

3.2.1 IPO Firm Performance

Accounting-based measures are commonly employed

for evaluating the performance of IPO firms,

particularly in emerging stock markets where stock

prices may not fully reflect available information. In

the IPO literature, ROA is employed to evaluate the

firm performance of IPOs, [4], [6], [7], [32], [37].

operating income by total assets.

3.2.2 Managerial Ownership

Managerial ownership is defined as the number of

common shares held by the board of directors and

executives. It is calculated by the common stock

owned by the board of directors and executives over

total common shares. In the post-IPO year,

managerial ownership is calculated by the common

shares retained by the board of directors and

3.2.3 Real Earnings Management (REM)

by, [13], [24], [40]. This study focuses on analyzing

two real earnings management practices: (1)

abnormal levels of cash flows from operations due to

sales-based manipulation, and (2) abnormal levels of

discretionary expenses resulting from reducing such

expenses. To maintain research precision, abnormal

production cost manipulation is excluded as a proxy,

considering the lower likelihood of younger IPO

firms engaging in such practices, [26]. Additionally,

a significant portion of the firms incorporated into

our sample are operating in the service industry.

Sales manipulation

operating cash flows, [24]. To evaluate the normal

level of operating cash flows, we initially ran a cross-

sectional analysis for the year and industry,

considering all non-IPO firms. However, due to the

small capital market in MAI, estimating the model on

an industry basis was not appropriate. Consequently,

we had to aggregate the data from all industries,

which is consistent with the approach taken by, [41].

Operating Cash flows are stated as a linear

function of sales and change in sales. The model used

CFOit/Ait-1 = α0 + α1(1/Ait-1) + β1(St/Ait-1) +

term capturing the abnormal level of operating cash

flows for firm i in year t.

the normal level of CFO, using the coefficients from

Equation (1).

Discretionary expenses

Discretionary expenses include R&D costs and

selling and administrative expenses. When these

(2)

DISEXPit is the sum of R&D expenses and selling

and administrative expenses of firm i in year t, while

other variables remain as previously defined.

The abnormal discretionary expenses of IPO

firms can be calculated as the change between the

actual discretionary expenses and the normality level

of discretionary expenses, which is valued using the

coefficients from Equation (2).

abnormal discretionary expenses, [26], [27]. The two

negative. Subsequently, we multiplied both variables

by -1 and summed them up to create an aggregated

REM measure. Indicated by a higher REM value is a

greater likelihood of IPO firms engaging in sale

manipulation and discretionary expense reduction to

boost reported earnings. The model used for

estimating REM is:

REM = Abnormal CFO*(-1) + Abnormal

DISEXP*(-1) (3)

assets ratio is a crucial leverage metric reflecting a

company's reliance on debt. It provides insights into

financial stability and management capability,

serving as a vital control variable in academic

research. Studies by, [6], [43], highlight the

relationship between leverage and IPO firms'

operating performance. To accurately assess the

leverage effect on earnings management and IPO

firm performance, the total liabilities to total assets

ratio is used as a control variable.

revenue growth signifies a decline in the ability to

generate profits, which can deter investor interest.

High revenue growth firms tend to engage in earnings

management, while those with low revenue growth

are more prone to resorting to such practices. In, [17],

the authors found no significant relationship between

sales growth and real earnings management in the

IPO year but negatively associated in the following

year. This advises that higher sales growth firms rely

less on earnings management, possibly due to

The existing literature suggests that the age of a

business has important implications for performance

indicators. Older enterprises typically have well-

established management and accounting systems,

reflecting the existence of a solid business model and

earnings management. Research by, [21], [44], found

a positive relationship between age and post-IPO

underscore the importance of considering firm age as

a control variable to capture potential effects on the

variables being studied.

To test the above hypotheses, we adopt the following

models (Table 1):

Pre-IPO year (year t-1)

ROAi,t-1 = α0 + β1MANGi,t-1 + β2GROWTHi,t-1+

β3LEVi,t-1+ β4AGEi,t-1+ IND + YR

+ ɛi,t-1

REMi,t-1 = α0 + β1MANGi,t-1 + β2GROWTHi,t-1+

β3LEVi,t-1+ β4AGEi,t-1+ IND + YR

+ ɛi,t-1

REMi,t+1 = α0 + β1MANGi,t+1 + β2GROWTHi,t+1+

β3LEVi,t+1+ β4AGEi,t+1+ IND + YR

+ ɛi,t+1

ROAi,t+1 = α0 + β1MANGi,t+1 + β2GROWTHi,t-1+

β3LEVi,t+1+ β4AGEi,t+1+ β5REMi,t+1+

IND + YR + ɛi,t+1

we follow these steps. Firstly, the analysis assesses

the effect of the independent variables on the

dependent variable using the coefficient (c). This

controlling for the independent variable using the

regression coefficient (b). This effect should be

statistically significant. Fourth and finally, the extent

of mediation by examining the coefficient (c') of the

independent variable is determined, while controlling

for the mediator variable. If this coefficient is not

statistically significant, it strongly suggests full

mediation. If on the other hand, it is significant, it

indicates partial mediation. Non-significant

coefficients (a or b) suggest no mediation. Figure 1

20% decrease in leverage between the pre-IPO and