Advertisement

Institutional ownership stability and real earnings management

  • Hamid SakakiEmail author
  • Dave Jackson
  • Surendranath Jory
Original Research

Abstract

We examine the relationship between institutional ownership stability and real earnings management. Our findings indicate that firms held by more stable institutional owners experience lower real activities manipulation by limiting overproduction. We further examine how the stability in the shareholdings of pressure-sensitive and insensitive institutional investors affect target firms’ use of real earnings management, respectively. Unlike pressure-sensitive institutional investors, the stability in the share ownership of pressure-insensitive institutional investors (i.e., investment advisors, pension funds and endowments) mitigates target firms’ use of real earnings management. Overall, our results are consistent with the view that institutional investors presence acts as a monitor on target firms’ use of real earnings manipulation activities.

Keywords

Institutional investors Earnings management Institutional ownership stability Real activities manipulations Institutional ownership persistence Real earnings management 

JEL Classification

G30 G32 

References

  1. Almazan A, Hartzell J, Starks LT (2005) Active institutional shareholders and cost of monitoring: evidence from managerial compensation. Financ Manage 34:5–34CrossRefGoogle Scholar
  2. Black A, Davies J, Wright PD (1998, 2001) In search of shareholder value: managing the drivers of performance, 2nd edn [1998 (1st edn), 2001 (2nd edn)]. Financial Times Prentice Hall. ISBN: 9780273650836, 0273650831Google Scholar
  3. Blume ME, Keim DB (2012) Institutional investors and stock market liquidity: trends and relationships. Available at SSRN 2147757Google Scholar
  4. Brickley J, Lease R, Smith C (1988) Ownership structure and voting on antitakeover amendments. J Financ Econ 20:267–292CrossRefGoogle Scholar
  5. Bushee BJ (1998) The influence of institutional investors on myopic R&D investment behavior. Account Rev 73:19–45Google Scholar
  6. Bushee BJ (2001) Do institutional investors prefer near-term earnings over long-run value? Contemp Account Res 18(2):207–246CrossRefGoogle Scholar
  7. Chen X, Harford J, Li K (2007) Monitoring: which institutions matter? J Financ Econ 86:279–305CrossRefGoogle Scholar
  8. Chin CL, Chen YJ, Hsieh TJ (2009) International diversification, ownership structure, legal origin, and earnings management: evidence from Taiwan. J Account Audit Finance 24(2):233–262Google Scholar
  9. Chung R, Firth M, Kim JB (2002) Institutional monitoring and opportunistic earnings management. J Corp Finance 8:29–48CrossRefGoogle Scholar
  10. Chung R, Firth M, Kim JB (2005) Earnings management, surplus free cash flow, and external monitoring. J Bus Res 58(6):766–776CrossRefGoogle Scholar
  11. Clifford CP (2008) Value creation or destruction? Hedge funds as shareholder activists. J Corp Finance 14(4):323–336CrossRefGoogle Scholar
  12. Cohen DA, Zarowin P (2010) Accrual-based and real earnings management activities around seasoned equity offerings. J Account Econ 50(1):2–19CrossRefGoogle Scholar
  13. Cohen DA, Dey A, Lys TZ (2008) Real and accrual-based earnings management in the pre- and post-Sarbanes–Oxley periods. Account Rev 83:757–787CrossRefGoogle Scholar
  14. Cornett MM, Marcus AJ, Saunders A, Tehranian H (2007) The impact of institutional ownership on corporate operating performance. J Bank Finance 31(6):1771–1794CrossRefGoogle Scholar
  15. Dechow PM (1994) Accounting earnings and cash flows as measures of firm performance: the role of accounting accruals. J Account Econ 18(1):3–42CrossRefGoogle Scholar
  16. Dechow PM, Ge W, Larson CR, Sloan RG (2011) Predicting material accounting misstatements*. Contemp Account Res 28(1):17–82CrossRefGoogle Scholar
  17. Elyasiani E, Jia JJ (2008) Institutional ownership stability and BHC performance. J Bank Finance 32(9):1767–1781CrossRefGoogle Scholar
  18. Elyasiani E, Jia JJ, Mao CX (2010) Institutional ownership stability and the cost of debt. J Financ Markets 13(4):475–500CrossRefGoogle Scholar
  19. Farooq O, El Jai H (2012) Ownership structure and earnings management: evidence from the Casablanca stock exchange. Int Res J Finance Econ 84:95–105Google Scholar
  20. Farooqi J, Harris O, Ngo T (2014) Corporate diversification, real activities manipulation, and firm value. J Multinatl Financ Manag 27:130–151CrossRefGoogle Scholar
  21. Farooqi J, Jory S, Ngo T (2015) Institutional investors’ activism and credit ratings. J Econ Finance 39(3):1–27Google Scholar
  22. Gaspar JM, Massa M, Matos P (2005) Shareholder investment horizons and the market for corporate control. J Financ Econ 76:135–165CrossRefGoogle Scholar
  23. Ge W, Kim JB (2014) Boards, takeover protection, and real earnings management. Rev Quant Financ Acc 43(4):651–682CrossRefGoogle Scholar
  24. Gillan SL, Starks LT (2007) The evolution of shareholder activism in the United States. J Appl Corp Finance 19(1):2007CrossRefGoogle Scholar
  25. Graham JR (1996a) Debt and the marginal tax rate. J Financ Econ 41(1):41–73CrossRefGoogle Scholar
  26. Graham JR (1996b) Proxies for the corporate marginal tax rate. J Financ Econ 42(2):187–221CrossRefGoogle Scholar
  27. Graham JR, Mills LF (2008) Using tax return data to simulate corporate marginal tax rates. J Account Econ 46(2):366–388CrossRefGoogle Scholar
  28. Graham J, Harvey C, Rajgopal S (2005) The economic implications of corporate financial reporting. J Account Econ 40:3–73CrossRefGoogle Scholar
  29. Guercio Del (1996) The distorting effect of the prudent-man laws on institutional equity investment. J Financ Econ 40:31–62CrossRefGoogle Scholar
  30. Hadani M, Goranova M, Khan R (2011) Institutional investors, shareholder activism, and earnings management. J Bus Res 64(12):1352–1360CrossRefGoogle Scholar
  31. Harris MS (1998) The association between competition and managers’ business segment reporting decisions. J Account Res 36(1):111–128CrossRefGoogle Scholar
  32. Jafarinejad M, Jory SR, Ngo TN (2015) The effects of institutional ownership on the value and risk of diversified firms. Int Rev Financ Anal 40:207–219CrossRefGoogle Scholar
  33. Jiraporn P, Kim YS, Davidson WN, Singh M (2006) Corporate governance, shareholder rights and firm diversification: an empirical analysis. J Bank Finance 30(3):947–963CrossRefGoogle Scholar
  34. Karpoff J (2001) Does shareholder activism work? A survey of empirical findings. Unpublished working paper, University of Washington, Seattle, WAGoogle Scholar
  35. Koh S (2007) Institutional investor type, earnings management and benchmark beaters. J Account Public Policy 26:267–299CrossRefGoogle Scholar
  36. Lin L, Manowan P (2012) Institutional ownership composition and earnings management. Rev Pac Basin Finan Mark Policies 15(04):1250022CrossRefGoogle Scholar
  37. Lin F, Wu CM, Fang TY, Wun JC (2014) The relations among accounting conservatism, institutional investors and earnings manipulation. Econ Model 37:164–174CrossRefGoogle Scholar
  38. McNichols MF (2001) Research design issues in earnings management studies. J Account Public Policy 19(4):313–345Google Scholar
  39. Mitra S, Cready W (2005) Institutional stock ownership, accrual management, and information environment. J Account Audit Finance 20:257–286CrossRefGoogle Scholar
  40. Mohd N, Ahmed K (2005) Earnings management of distressed firms during debt renegotiation. Account Bus Res 35(1):69–86CrossRefGoogle Scholar
  41. Othman HB, Zeghal D (2006) A study of earnings-management motives in the Anglo-American and Euro-Continental accounting models: the Canadian and French cases. Int J Account 41(4):406–435CrossRefGoogle Scholar
  42. Pound J (1988) Proxy contests and the efficiency of shareholder oversight. J Financ Econ 20:237–265CrossRefGoogle Scholar
  43. Rajgopal S, Venkatachalam M, Jiambalvo JJ (1999) Is institutional ownership associated with earnings management and the extent to which stock prices reflect future earnings? Available at SSRN 163433Google Scholar
  44. Romano R (2001) Making institutional investor activism a valuable mechanism of corporate governance. Yale J Regul 18:174–251Google Scholar
  45. Roychowdhury S (2006) Earnings management through real activities manipulation. J Account Econ 42:335–370CrossRefGoogle Scholar
  46. Roychowdhury S, Watts RL (2007) Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting. J Account Econ 44(1):2–31CrossRefGoogle Scholar
  47. Walker M (2013) How far can we trust earnings numbers? What research tells us about earnings management. Account Bus Res 43:445–481CrossRefGoogle Scholar
  48. Woidtke T (2002) Agents watching agents? Evidence from pension fund ownership and firm value. J Financ Econ 63:99–131CrossRefGoogle Scholar
  49. Yan X, Zhang Z (2009) Institutional investors and equity returns: are short-term institutions better informed? Rev Financ Stud 22(2):893–924CrossRefGoogle Scholar
  50. Zang AY (2012) Evidence on the trade-off between real activities manipulation and accrual-based earnings management. Account Rev 87:675–703CrossRefGoogle Scholar
  51. Zhu X, Lu S (2013) Earnings management through real activities manipulation before mergers and acquisitions. J Finance Account 13:1Google Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.University of Texas Rio Grande ValleyEdinburgUSA
  2. 2.University of SussexBrightonUK

Personalised recommendations