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The relations among accounting conservatism, institutional investors and earnings manipulation

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  • Lin, Fengyi
  • Wu, Chung-Min
  • Fang, Tzu-Yi
  • Wun, Jheng-Ci

Abstract

Most scholars have indicated corporations using accounting conservatism to reduce earnings manipulation, although certain scholars believe that firms have more incentive to increase earnings manipulation. Institutional investors play an important external monitoring role, and affect firm's earnings manipulation. Previous studies adopted accruals as an earnings manipulation proxy to detect the relationship among accounting conservatism, institutional investor shareholdings, and earnings manipulation. We further investigate the relationship among accounting conservatism, institutional investor shareholdings, and earnings manipulation by using Benford's law. Our results indicate that firms with more conservative financial reporting have less probability of engaging in earnings-manipulative activities. We also find the negative association between earnings management and institutional investor shareholdings. However, if corporate financial statements tend toward conservatism, institutional investor shareholdings could increase managers' incentive to manage earnings. Our findings have important implications for investors to make investment decisions.

Suggested Citation

  • Lin, Fengyi & Wu, Chung-Min & Fang, Tzu-Yi & Wun, Jheng-Ci, 2014. "The relations among accounting conservatism, institutional investors and earnings manipulation," Economic Modelling, Elsevier, vol. 37(C), pages 164-174.
    • Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:164-174
    DOI: 10.1016/j.econmod.2013.10.020
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    Cited by:

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    3. Hou, Fei & Liu, Jie & Pang, Tingyun & Xiong, Hao, 2020. "Signing auditors’ foreign experience and audit pricing," Economic Modelling, Elsevier, vol. 91(C), pages 300-312.
    4. Guochao Wan & Ahmad Yahya Dawod, 2022. "ESG Rating and Northbound Capital Shareholding Preferences: Evidence from China," Sustainability, MDPI, vol. 14(15), pages 1-19, July.
    5. Oyotode-Adebile, Renee & Hibbert, Ann Marie & Shankar, Siddharth, 2022. "The impact of gender-diverse board and institutional investors on accruals management," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    6. Shen, Huayu & Liu, Runxin & Xiong, Hao & Hou, Fei & Tang, Xiaoyi, 2021. "Economic policy uncertainty and stock price synchronicity: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    7. Kimouche Bilal & Charchafa Ilyes, 2024. "Impact of Accounting Conservatism on Income Smoothing: Empirical Evidence from Algeria," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 34(1), pages 37-55, March.
    8. Chen-Yin Kuo, 2018. "Are the forecast errors of stock prices related to the degree of accounting conservatism?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(6), pages 1-9.
    9. Baig, Ahmed & DeLisle, R. Jared & Zaynutdinova, Gulnara R., 2022. "Index mutual fund ownership and financial reporting quality," Research in International Business and Finance, Elsevier, vol. 62(C).
    10. Jo-Ting Wei, 2021. "Financial Reporting Material Misstatements, Earnings Conservatism and Managerial Replacement Decisions," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 14(1), pages 7-21, June.
    11. Hamid Sakaki & Dave Jackson & Surendranath Jory, 2017. "Institutional ownership stability and real earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 227-244, July.
    12. Que, Jiangjing & Zhang, Xueyong, 2019. "Pre-IPO growth, venture capital, and the long-run performance of IPOs," Economic Modelling, Elsevier, vol. 81(C), pages 205-216.

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