Institutional ownership, earnings management and earnings surprises: evidence from 39 years of U.S. data

Justin G. Davis and Miguel García-Cestona

Journal of Economics, Finance and Administrative Science, 2023, vol. 28, issue 56, 218-236

Abstract: Purpose - As the influence of institutional investors over managerial decision-making grows, so does the importance of understanding the effect of institutional investor ownership (IO) on firm outcomes. The authors take a comprehensive approach to studying the effect of IO on earnings management (EM). Design/methodology/approach - The authors study the relation between IO and EM using a sample of 59,503 listed U.S. firm-year observations from 1981–2019. The authors proxy EM with earnings surprises and with accrual-based and real activity measures. The authors test for nonlinear relations and analyze changes resulting from the passage of the Sarbanes–Oxley Act. Findings - The findings support a positive IO-EM relation overall, but show that the relation is dynamic and heavily context-dependent with evidence of nonlinearity. The authors also find evidence that IO positively affects accrual-based EM and real activities EM negatively. Originality/value - To the authors’ knowledge, this is the first study of the IO-EM relation to consider evidence of nonlinearity in the U.S. context, measuring changes to the relation over time, and with the use of several measures of EM.

Keywords: Financial reporting quality; Institutional investor ownership; Earnings management; Earnings surprises; Corporate governance; Nonlinearity; G23; G32; G34; M41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jefasp:jefas-01-2023-0021

DOI: 10.1108/JEFAS-01-2023-0021

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