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Institutional ownership stability and real earnings management

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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.

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Notes

  1. FASB No. 14 and SEC Regulation S-K require firms to report information on segments whose sales, assets, or profits exceed 10 % of the consolidated totals.

  2. Industry is defined based on the Fama and French 48-sector industry classification.

  3. All earnings management variables are winsorized at the 1 % level to alleviate the impact of extreme observations.

  4. Marginal tax rates retrieved from Dr. John Graham home page: https://faculty.fuqua.duke.edu/~jgraham/.

  5. Source: http://www.accaglobal.com/gb/en/discover/ab-articles/audit-assurance/problem-rotation.html.

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Authors and Affiliations

  1. University of Texas Rio Grande Valley, Edinburg, TX, USA

    Hamid Sakaki & Dave Jackson

  2. University of Sussex, Brighton, UK

    Surendranath Jory

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  1. Hamid Sakaki
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  2. Dave Jackson
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  3. Surendranath Jory
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Correspondence to Hamid Sakaki.

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Sakaki, H., Jackson, D. & Jory, S. Institutional ownership stability and real earnings management. Rev Quant Finan Acc 49, 227–244 (2017). https://doi.org/10.1007/s11156-016-0588-7

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