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Journal of Economics, Finance and Administrative Science
Print version ISSN 2077-1886
Abstract
DAVIS, Justin G. and GARCıA-CESTONA, Miguel. Institutional ownership, earnings management and earnings surprises: evidence from 39 years of U.S. data. Journal of Economics, Finance and Administrative Science [online]. 2023, vol.28, n.56, pp.218-236. Epub Dec 15, 2023. ISSN 2077-1886. http://dx.doi.org/10.1108/jefas-01-2023-0021.
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.