Earnings management, institutional ownership and investment efficiency: evidence from a developing country

Aref M. Eissa, Tamer Elgendy and Ahmed Diab

Journal of Financial Reporting and Accounting, 2023, vol. 23, issue 3, 1206-1226

Abstract: Purpose - This study investigates the effect of earnings management (EM) and institutional ownership (IO) on investment efficiency (IE). It also investigates the effect of IO, as a governance mechanism, on the relation between EM and IE. Design/methodology/approach - This study examines a sample of Egyptian firms listed on EGX100 during the period 2014–2019. The data are collected manually from firms’ annual reports and governance reports obtained from Egypt for Information Dissemination Company. We depend on thet-test, Pearson correlation, and OLS regression to test our hypotheses. Findings - The results revealed a negative relationship between EM and IE. In contrast, IO has a significant and positive effect on IE. The results also show that IO mitigates the negative implications of EM for IE. Additionally, we find robust evidence for the governance role of pressure-insensitive IO, as it has a positive effect on IE and on mitigating the negative effects of EM on IE. Originality/value - To our knowledge, this is the first study to examine the effect of IO as a governance mechanism on the relationship between EM and IE. The results of this study can be of interest to investors, regulators, and policy-makers due to highlighting the potential implications of EM and IO for firms’ investment decisions in Egypt–one of the important emerging markets in the Middle East and Africa.

Keywords: Earnings management; Institutional ownership; Investment efficiency; Corporate governance; Egypt (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrapp:jfra-10-2022-0392

DOI: 10.1108/JFRA-10-2022-0392

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