4.2.3. Results Hypothesis 3 and 4—Share Ownership by Directors

The regression analysis shows a significantly positive relationship between share ownership by directors and earnings management, suggesting a direct positive effect between increasing the percentage of directors who owns shares in the company and the latitude of earnings management. The finding is not in line with the hypothesis, nor the results of Gul et al. (2002). As suggested by Kanagaretnam et al. (2007), directors' shareholdings are associated with smaller increases in information asymmetry, which in turn has the potential to reduce agency costs and thus mitigate the occurrence of earnings management. With respect to the finding, one could therefore argue that there may be other elements of importance when evaluating the effect of directors' shareholdings on earnings management. Supported by Lin and Hwang (2010), the result may provide evidence that directors who own shares in the company are subject to weakened independence and weakened

effectiveness in impartial monitoring, leading to increased agency problems and earnings management. The result is fairly congruent with the findings of Peasnell et al. (2005), who found a positive, though not significant relationship between directors' shareholding and earnings management. It would also be of importance to include the fourth hypothesis in this analysis to more thoroughly assess the assumption. For the fourth hypothesis, the analysis finds a negative, though not significant relation between majority shareholding by directors and earnings management. Even though the result does not support a direct negative effect on earnings management, its implications are of interest. It could imply that majority share ownership gives directors an incentive to prioritize the company's strategic growth. If so, this would help to reduce agency problems related to dissimilar financial interests between the shareholders and the members of the board. The sample data shows that the mean of share ownership by directors and the mean of majority shareholding by directors are respectively 63 percent and 22 percent of the total board size. This implicates that on average 65 percent of the directors who own shares in the company are considered minority share owners with a greater likelihood of a short-term ownership perspective. Given a short-term ownership perspective, they have greater incentives to pursue higher-risk strategies to generate larger financial returns. Combined, these assumptions could implicate that companies with large proportions of minority shareholders on the board manage earnings more frequently. Given these findings, the results corroborate NUES (2018) recommendations regarding directors' long-term and short-term shareholdings.
