The paper investigates the impact of shareholder concentration on earnings management. The data is obtained from the annual reports of companies listed on the South Pacific Stock Exchange to empirically test for the relationship between shareholder concentration and absolute discretionary accruals. The results suggest that companies with high shareholder concentration tend to support managers' choice of accounting if it benefits the companies.

Earnings Management (EM) is a major concern for all the stakeholders in an organization. Prior research has identified many corporate governance mechanisms that constrain EM (Wild, 1996; Klein, 2000; Chtourou et al., 2001; Cheng and Reitenga, 2003; Davidson et al., 2005; Peasnell et al., 2005; Teshima and Shuto, 2005; Dhaliwal et al., 2006; and Yu, 2006). This study deals with an aspect of corporate governance Shareholder Concentration (SC) and its ability to constrain EM behaviors. Using a sample of 99 firm-years, the study empirically tests the relationship between SC and Discretionary Accruals (DAC).

Healy and Wahlen (1999) identified that EM literature requires additional evidence on the factors that would limit earnings management. Shareholders usually have a major stake in the organizations. They are the owners and, therefore, naturally take more interest in the functioning of the company. They also have incentives to support the managers' choices of accounting, if it benefits them. In the light of this information, the question that arises is: Will shareholders constrain EM or support managers' accounting choices?

Accounting Research Journal, Emerging Markets, Earnings Management, Corporate Governance Mechanisms, Discretionary Accruals, EM Literature, Corporate Ownership Structure, Accounting Research, Financial Reporting, Internal Governance Structures, Empirical Research, Financial Statements, Earnings Management Model.