External Blockholder Concentration and Real Earnings Management in India: Re-evaluating the Private Benefit Hypothesis in Group-Affiliated Firms

ABSTRACT

This study investigates the association between external blockholder concentration and real earnings management (REM) among group-affiliated firms in India. Grounded in the Private Benefit Hypothesis, the research posits that external blockholders — motivated by short-term performance gains — may exert pressure on managers to manipulate reported earnings. Using a comprehensive dataset of 652 firms representing 4,342 firm-year observations from 2011 to 2021, the study measures REM through discretionary spending adjustments in advertising, research and development (R&D), and selling, general, and administrative (SGA) expenses. The findings reveal that promoter ownership does not induce REM; instead, higher promoter holdings are associated with reduced earnings manipulation. Conversely, a greater concentration of external blockholders significantly increases REM, suggesting that firms with substantial outsider ownership may strategically reduce discretionary expenditures to inflate short-term earnings. Potential explanations include speculative investment motives, strategic alignment between external blockholders and management, free-rider challenges, and limited monitoring expertise. The moderating analysis further indicates that the influence of external blockholders weakens as business group size increases, underscoring the complex dynamics of ownership structures within conglomerates. Overall, the study contributes to the literature on ownership structure and financial reporting quality in emerging markets. The results highlight that transient external investors tend to encourage real activity manipulation, whereas long-term investment horizons may enhance reporting transparency. These insights hold strong implications for regulators and policymakers seeking to strengthen governance mechanisms and improve corporate disclosure quality in India.