This paper investigates how managerial ownership affects earnings timeliness and conservatism. Prior research has provided mixed evidence on the relation between managerial ownership and earnings qualities. This paper complements the literature by providing additional evidence on this topic. I define earnings timeliness and conservatism following Basu (1997): Timeliness is defined as the speed at which accounting earnings incorporate news, and is empirically measured by the sensitivity of earnings to unexpected stock returns; conservatism is defined as when bad news is reflected in accounting earnings more quickly than good news, and is empirically measured by the asymmetry in earnings’ sensitivity to positive returns and negative returns. To test the impact of managerial ownership, I extend the model in Basu (1997) by incorporating a dummy variable that equals 1 if the firm’s percentage of managerial ownership is above a threshold and zero otherwise. Specifically, I allow this dummy variable to interact with each term in the original Basu (1997) model. Using a sample of 8,886 firm-year observations from 1994 to 2003, I find that firms with a higher percentage of managerial ownership exhibit more timely and conservative patterns in their annual earnings.
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