This study examines whether the second largest shareholders are related to the earnings management of Mutual Savings Banks in Korea from 2003 to 2012. A negative relationship is found between the second largest shareholders and the discretionary porti...
This study examines whether the second largest shareholders are related to the earnings management of Mutual Savings Banks in Korea from 2003 to 2012. A negative relationship is found between the second largest shareholders and the discretionary portion of the allowance provisions.In general, most of the Mutual Savings Banks in Korea have a single largest blockholder, so the possibility of earnings management for the largest shareholder’s private interest is higher than other financial institutions. However, if the firms have multiple blockholders, the second largest shareholder can exercise their control over banks. Then the shareholders can eliminate or supervise the earnings management for the largest shareholder’s private interest. In this regard, the paper verifies whether Mutual Savings Banks (MSB), with higher equity from the second largest shareholder can reduce the earnings of management by discretionary allowance for loan losses. We find that banks from the second largest shareholder with higher equity, has significant negative relations with the Discretionary portion of Allowance for Loan Losses (DALL). This result suggests that the greater the second largest shareholder’s equity, the less likely the opportunistic earnings management. This paper extends the literature on financial institutions’ earnings management to verify whether governance systems, especially ownership structure and earnings management, have significant relations.