Evaluating the Relationship between Ownership Structure as Corporate Governance Mechanism and Accounting Earnings Management Tools on the Financial Performance : A Case of Egypt MRs .

This study focused on examining whether the internal mechanisms of corporate governance especially ownership structure (institutional /family) can control earning management manipulations and enhance the firm performance. As there has been an ongoing debate and conflict on whether the existence of institutional /family ownership eliminate or increase accounting earning management manipulations in the listed companies in Egyptian stock exchange. This study focused on 49 listed companies whose shares are among Egypt„s 100 most actively traded shares (EGX100 price index) form the years (2006 to 2013) after excluding Firms with insufficient data, Banks and Financial Institutions, and Insurance companies from annual reports of Egyptian companies, Egyptian disclosure Books, and Egyptian financial statements. The study employs an advanced panel threshold regression estimation developed in 1999 by Hansen that test whether there are positive and negative impacts of ownership structure on earning management and firm value. This estimation procedure has the advantage of quantifying the threshold level of ownership structure as compared to the ad hoc classification procedure of splitting the sample. The results show that institutional ownership is only pertinent to the firm value up to a threshold level from (62%64 %). While, family ownership is only pertinent to the firm value up to a threshold level from (36%-41%). Additional increase in level of ownership structure beyond the threshold level does not add to a firm's value. This is the first study to look at this issue for Egyptian listed firms to apply the appropriate level of ownership structure, which would thus decrease the management opportunistic behavior, and maximize the firm and stockholders' value. An excessive level of ownership structure could lead to sever agency problems and overhang situation at the microeconomic firm level; this could eventually could cause vulnerability in financial systems and thus lead to the financial catastrophes. These suggested amendments could contribute towards enhancing the impact of the Egyptian corporate governance guidelines on the performance of listed companies in the Egyptian capital market. Regulatory bodies such as Securities Commission, Egyptian stock Market and Committee of Egyptian Code of Corporate Governance need to take note on the percentage of concentrated ownership among the Egyptian listed companies to enhance and develop performance of Egyptian stock exchange. _________________________________________________________________________________________ Keywords: institutional-ownership, family-ownership, corporate governance, accounting earning management, financial performance, egyptian stock market, and panel threshold analysis INTRODUCTION Within the broader context of globalization, liberalization, deregulation, and corruption, almost all organizations (private, public, or non-governmental) are competing to enhance their accountability and reliability and to increase the stakeholders confidence, thus, they require to govern the organization and to link their shareholders (owners) interest and stakeholders with management (agent), otherwise known as “corporate governance”. A number of big-name corporate collapse, accounting irregularities, corporate corruption, remuneration excesses and inadequate disclosure practices such as (Swissair, Enron, Arthur Andersen, Parmalat, Adecco, Yukos, Baring bank, World-com, UBS) have made the investors wary of corporate governance system. Thus, Corporate governance has indeed received a lot of attention in the recent year both in academic and the professional literature. Both inside and outside boardrooms including directors, stakeholders, and regulators enthusiastically recommended it and have successfully enacted corporate governance reforms into law in some countries such as USA (Sarbanes-Oxley Act, 2002), UK Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(6):390-406 © Sch larlink Research Institute Journals, 2015 (ISSN: 2141-7024) jetems.scholarlinkresearch. com Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(6):390-406 (ISSN: 2141-7016) 391 (Combined code of corporate governance, 2003), International (OECD principles of corporate governance, 2001, 2004) and Egypt (Code of corporate governance, 2005) In this regard, the OECD (2001) stressed on the importance of corporate governance for national development due to its growing role in helping to increase the flow of financial capital to firms in developing countries. Correspondingly, Babic (2003) further emphasized that corporate governance is doubly critical in transition countries. The scarcity of domestic savings demands that capital be directed towards the most profitable companies, which is possible only if principles of corporate governance are given publicity, transparency and monitoring. A result for the imperfection of market mechanisms (underdeveloped stock and bond markets and ineffective banking system), corporate governance presents an additional mechanism for discipline and effective management control in corporations. Thus, good corporate governance is an important factor for the functioning of a financial market, which leads to efficient and equitable allocation of financial resources. Accordingly, corporate governance has become increasingly imperative for underpinning growth prospects especially among emerging markets. It has an important role not only attracting foreign direct investment but also in enabling domestic enterprises to move beyond their family base to tape new sources of capital on a sustainable basis. In addition, protecting the environment, employees and society at large, are crucial objectives for corporate governance in developing countries. However, Mensah (2002) claimed that developing countries are poorly equipped to implement effectively the corporate governance found in the developed market economies because developing countries are characterized by state ownership of firms, interlocking relationships between governments and financial sectors, weak legal and judiciary systems and limited human resource capabilities. Within this context, the countries with a civil law legal system tend to provide less protection to shareholders than countries with a common-law legal system. Accordingly, this can be the reason for the initial issuance of the Egyptian corporate governance guideline in 2005. Literature studies such as (Shleifer and Vishny (1997), La Porta et al., (1999), and Claessens et al. (2000) referred that codes of corporate governance can serve to compensate for the lack of protection in the legal system and thus would be more likely to be adopted in civil law countries. From this standpoint, the study aims to highlight the important role played by Egyptian corporate governance guidelines in Egypt's corporate governance system. Literature also provided that in countries following a civil-law legal system, issuers of corporate governance codes can include stock exchanges, governments, director„s association, managers association, professional association or investors. Again, this typically applies to Egypt's case where the issuer of the initial Egyptian corporate governance guidelines (2005) was the Egyptian institute of directors in cooperation with the Egyptian stock exchange (government authority). Consequently, this highlights the important role of the Egyptian government and stock exchange (being the issuers) towards the sound adoption and implementation of the Egyptian guidelines among Egyptian listed companies. However, the fact that the code is " partially voluntary" can result in more difficulties in its implementation and enforcement, which justifies McGee (2010) study on Egypt, which concluded, "Enforcement of the corporate governance rules continues to be a challenge". Additionally, Emerging countries are not effective in applying the corporate governance mechanisms either internal or external mechanisms. There are many examples for inappropriateness of CG mechanisms in transition economies as follow:  Board of directors do not perform their responsibilities and tasks as determined in corporate governance guidelines, they can be considered as one of the main causes of corporate corruption and collapse such as Enron, World-com, and Parmalat scandals (Adams and Mehran, 2011).  One of the serious problems that investors face in the emerging market place is the information asymmetry that may lead to extreme deficiencies in transparency and disclosure practices. Thus, this is due to the lack of using accounting information system in supporting board of director to continuously monitor the process of disclosure and communications, to ensure from the integrity of the corporations accounting and financial reporting systems, and to demonstrate transparency and social accountability.  The existing corporate governance literature in the developed market economy is almost exclusively concerned with external mechanisms (accounting, transparency to improve the accuracy of stock market valuations, regulatory pursuit of fraud, the role Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(6):390-406 (ISSN: 2141-7016) 392 of the shareholders„ general meeting, disciplinary takeovers and legal requirements for the appointment of external directors (Monks, 2002). On the contrast, these mechanisms of market discipline in transition economies hardly work because of the lack of such institutions as stock markets and an efficient banking sector.  In emerging markets, the internal mechanisms including owners, board of directors and managers differ significantly in comparison to the internal mechanisms of the developed market economies. For instance, the concept of ownership itself is problematic. Ownership of post-socialist enterprises was often shared between the state, public corporate bodies, mangers, employees, ot