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Characteristics of institutional investors and discretionary accruals

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  • C.S. Agnes Cheng
  • Austin Reitenga
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    Abstract

    Purpose – The purpose of this paper is to examine the differential effects of institutional non-blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretionary accruals. Design/methodology/approach – This paper also proposes that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (EP) (i.e. the gap between target earnings and pre-managed earnings). In particular, it believes that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of EPs is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of EP is there. The sample into three EP conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings is grouped. Consistent with the expectations, the paper finds that NONB stimulates earnings management, but only when EP is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings. Findings – This paper also predicts that ACTB will need to exercise their monitoring power only when EP is strong. The results confirm this prediction, but only when there is strong pressure to increase earnings. When there is strong pressure to decrease earnings, inconclusive evidence regarding the effect of ACTB is found. This may imply that ACTB are conservative since they appear to be more likely to limit income-increasing accruals than they are to limit income-decreasing accruals. Originality/value – This paper's contributions to the literature are twofold: the paper shows that the characteristics of institutional investors (INSTs) should be considered when examining the relationship between INSTs and earnings management; the paper shows that the direction and level of EP should be considered when evaluating the relationship between INSTs and earnings management.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal International Journal of Accounting and Information Management.

    Volume (Year): 17 (2009)
    Issue (Month): 1 ( March)
    Pages: 5-26

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    Handle: RePEc:eme:ijaipp:v:17:y:2009:i:1:p:5-26

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Corporate governance; Earnings; Investors;

    References

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    1. Brickley, James A. & Lease, Ronald C. & Smith, Clifford Jr., 1988. "Ownership structure and voting on antitakeover amendments," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 267-291, January.
    2. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    3. Dechow, Patricia M. & Sloan, Richard G., 1991. "Executive incentives and the horizon problem : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 51-89, March.
    4. Gaver, Jennifer J. & Gaver, Kenneth M. & Austin, Jeffrey R., 1995. "Additional evidence on bonus plans and income management," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 3-28, February.
    5. DeFond, Mark L. & Park, Chul W., 1997. "Smoothing income in anticipation of future earnings," Journal of Accounting and Economics, Elsevier, vol. 23(2), pages 115-139, July.
    6. Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
    7. Michael E. Porter, 1992. "Capital Choices: Changing The Way America Invests In Industry," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 4-16.
    8. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
    9. Press, Eric G. & Weintrop, Joseph B., 1990. "Accounting-based constraints in public and private debt agreements : Their association with leverage and impact on accounting choice," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 65-95, January.
    10. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    11. Cornett, Marcia Millon & Marcus, Alan J. & Tehranian, Hassan, 2008. "Corporate governance and pay-for-performance: The impact of earnings management," Journal of Financial Economics, Elsevier, vol. 87(2), pages 357-373, February.
    12. Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Annual bonus schemes and the manipulation of earnings," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 29-74, February.
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    Cited by:
    1. Gin Chong & Henry Huang & Yi Zhang, 2012. "Do US commercial banks use FAS 157 to manage earnings?," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 20(1), pages 78-93.
    2. Yu Chen & Zabihollah Rezaee, 2012. "The role of corporate governance in convergence with IFRS: evidence from China," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 20(2), pages 171-188.
    3. A.K.M. Waresul Karim & Tony van Zijl & Sabur Mollah, 2013. "Impact of board ownership, CEO-Chair duality and foreign equity participation on auditor quality choice of IPO companies: Evidence from an emerging market," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 21(2), pages 148-169, March.
    4. Juan Wang, 2011. "Transient institutional investors and insider trading signals," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 19(2), pages 118-145, June.
    5. Hichem Khlif & Mohsen Souissi, 2010. "The determinants of corporate disclosure: a meta-analysis," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 18(3), pages 198-219, September.

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