*2.3. Share Ownership by Directors*

It is difficult to state a clear theoretical prediction about the effect of share ownership by directors on earnings management. From an opportunistic point of view, share ownership by directors could weaken their independence and their effectiveness in monitoring financial reporting (Lin and Hwang 2010). On the other hand, managers of firms with low director ownership are expected to exploit the latitude of accounting standards to ease financial constraints, indicating that higher share ownership by directors will reduce the occurrence of earnings management (Gul et al. 2002). It is also found that directors' shareholdings are associated with smaller increases in information asymmetry (Kanagaretnam et al. 2007), which in turn could reduce agency costs and better prevent the occurrence of earnings management (Beatty and Harris 1999; Man 2019). The theoretical assumptions will also vary depending on the ownership structure. According to NUES (2018), long-term share ownership by directors contributes to create an increased common financial interest between the shareholders and the members of the board. With a majority shareholding in the company, and thus a longer-term ownership perspective, an investor is incentivized to prioritize the company's strategic growth. Further, NUES (2018) emphasize that a short-term ownership perspective may work against the best interest of the company and its shareholders. Prior studies on share ownership by directors and earnings management reflects the inconsistent assumptions. Peasnell et al. (2005) found a positive, though not significant, relation between share ownership by directors and earnings management, while Gul et al. (2002) reported a significantly negative relation. In their meta-analysis, Lin and Hwang (2010) documented no significant relationship. Based on the theoretical predictions and the existing literature, the following two hypotheses have been made:

**Hypothesis 3** (**H3**). *There is a relation between share ownership by directors and earnings management*.

**Hypothesis 4** (**H4**). *There is a negative relation between the percentage of directors as majority shareholders and earnings management*.
