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1.1       Background to the Study

Accounting has developed over time as an essential stewardship function, which

enables owners of the business to extract accountability from the managers who are entrusted

with the task of running the organization. The custodianship function is at the root of

corporate governance, and provides the basis for the sacred trust upon which modern

business is built (Osisioma, 2001). The separation of ownership and control due to growth in

the size of businesses during the industrial revolution in the 19th century led to the

development of stewardship accounting, where those in control of business were made to

report to the owner by providing them with accounting information through annual reports

and accounts. The annual reports which are usually prepared on historical basis at the end of

every financial year are expected to serve as a measurement of firm value which should more

or equal to market value. Any change in the value of the firm as a result of income generated

from operations indicates an improvement in firm‟s value. The level of improved earnings

reported in the annual reports determines the informativeness of the accounting figures in the

firm‟s financial statement.

Informativeness of accounting earnings involved the accounting process of measuring

earnings as the change in firm‟s wealth and focusing on fair valuing of assets and

liabilities(Dechow, Ge and Schrand,2009). The information quality of reported earnings is

influenced by an array of factors, most of which stem from the demand for such information

for use in contractual arrangements. Firm‟s ownershipstructure are among the factors that

influences quality of reported earnings due to incentive alignment and monitoring effects of


the selected components of ownership structure. Managers to a greater extent are the ones

entrusted with the affairs of firms whom in most cases have little or no equity interest in it.

The real equity owners on the other hand have little or no direct day-to-day running of the

firm. In that respect, managers are vested with the responsibility of preparation and reporting

of the earning figures (profit) of the firm they managed. Consequently these pave way for

manouvering the information content of the report to suit their interest.

Thus, the managers as agents need to be monitored to ensure that they discharge their

stewardship role to their principal (firm owners) rather than adjusting reports to earn high

rewards at the detriment of the equity holders. As long as managers‟ oppotunistic tendency

are not monitored by shareholders because of diverse nature of equity holdings, reported

earnings will continue to be manipulated and the informativeness it deserves to portray to

firm owners for decision making is eroded. Block of shareholders if effectively were in

control of a firm, they could also control the production of the firm‟s accounting information

and reporting policies and vice versa.

Literature on stewardship accounting posits that an accounting number is deemed

value relevant if it has a significant association with equity market value (Barth, Beaver, &

Landsman, 2001), and could be used to estimate future returns (Beaver, 1968). Thus, if

reported earnings are considered by investors to be value relevant and useful in estimating

future returns, market value of shares and earnings should normally be related.

Ownership structure is considered as an important factor that influences the quality of

a firms financial reports and that it is possible to use ownership structure to predict the

informativeness of a bank‟s reported earnings by considering the earnings-returns


relationship with managerial ownership, earnings returns relationship with Institutional

Ownership as well as earnings-returns relationship with Ownership Concentration.

Managers may impair the faithful determination of accounting numbers in order to

meet the performance measures imposed by accounting-based contracts. Therefore,the

quality of accounting information may be positively associated with the level of managerial

ownership (Warfield, Wild and Wild, 1995). On the other hand, there are countervailing

incentives for managers to reduce the quality of accounting information. As managerial

ownership increases, managers are increasingly less subject to accounting-based constraints.

Thus, managers will reduce reporting quality if there exist the proprietary costs of disclosure,

since the less managers disclose, the less competitors and suppliers know about the firm‟s

financial position (Dye, 1985 and Hayes & Lundholm, 1996).

Institutional investors are often characterized as sophisticated investors who have

advantages in acquiring and processing information compared with individual investors

(Bushee, 1998). However, their specific role in improving reporting quality is quite

controversial. There are two opinions about the role of institutional ownership in the capital

market. The speculation argument is that institutional investors act as “traders” rather than

“owners.” Prior research provides several reasons why they act as transient investors. First,

institutions are subject to strict fiduciary responsibilities so that they have incentives to trade

frequently based on short-term financial performance in order to show fund sponsors and the

courts the prudence of their investment (Gompers & Metrick, 2001). Second,

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