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Does the Presence of Institutional Investors Influence Accruals Management? Evidence from Australia


  • Grace C.-M. Hsu

    (UQ Business School, The University of Queensland.)

  • Ping-Sheng Koh


Recent debates on the corporate governance role of institutional investors have centred around whether they monitor their portfolio firms (exercise voice) or vote with their feet (exit). We examine these competing views in the context of how institutions' voice vs exit role, proxied by institutional ownership levels, is associated with their portfolio firms' earnings management in multiple settings. We extend Koh (2003, "The British Accounting Review", 35, 105-128) by examining the effect of both short-term and long-term oriented institutional ownership on the extent of earnings management by portfolios firms with different incentives for earnings management. Specifically, we expect that the non-linear relation between institutional ownership and earnings management found in Koh (2003) is more likely to be present for portfolio firms with stronger incentives to meet/beat earnings thresholds. Our results suggest that transient and long-term oriented institutions co-exist and have differential effects on portfolio firms' earnings management. Transient institutions are associated with upward accruals management, while long-term oriented institutions constrain such upward accruals management for portfolio firms that have strong incentives to do so (specifically, firms with non-discretionary earnings below prior year earnings). This suggests long-term oriented institutions can act as a corporate governance mechanism to mitigate aggressive earnings management. Overall, we find that the association between institutional ownership and earnings management is not systematic across all firms and is context dependent, suggesting complex associations between institutional ownership and earnings management strategies exist. Copyright Blackwell Publishing Ltd 2005.

Suggested Citation

  • Grace C.-M. Hsu & Ping-Sheng Koh, 2005. "Does the Presence of Institutional Investors Influence Accruals Management? Evidence from Australia," Corporate Governance: An International Review, Wiley Blackwell, vol. 13(6), pages 809-823, November.
  • Handle: RePEc:bla:corgov:v:13:y:2005:i:6:p:809-823

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    References listed on IDEAS

    1. Michael C. Jensen, 2010. "Value Maximization, Stakeholder Theory, and the Corporate Objective Function," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 32-42.
    2. Charkham, Jonathan & Simpson, Anne, 1999. "Fair Shares: The Future of Shareholder Power and Responsibility," OUP Catalogue, Oxford University Press, number 9780198292142, June.
    3. Veblen, Thorstein, 1921. "The Engineers and the Price System," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number veblen1921.
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    Cited by:

    1. Kamran & Attaullah Shah, 2014. "The Impact of Corporate Governance and Ownership Structure on Earnings Management Practices: Evidence from Listed Companies in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(2), pages 27-70, July-Dec.
    2. repec:eee:finana:v:52:y:2017:i:c:p:62-76 is not listed on IDEAS
    3. Muniandy, Puspa & Tanewski, George & Johl, Shireenjit K., 2016. "Institutional investors in Australia: Do they play a homogenous monitoring role?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 266-288.
    4. Henry, Darren, 2010. "Agency costs, ownership structure and corporate governance compliance: A private contracting perspective," Pacific-Basin Finance Journal, Elsevier, vol. 18(1), pages 24-46, January.
    5. Yves Mard & Sylvain Marsat, 2011. "Gestion des résultats comptables et structure de l'actionnariat : le cas français," Post-Print hal-00650550, HAL.
    6. Rashid Ameer, 2012. "Impact of cash holdings and ownership concentration on firm valuation: Empirical evidence from Australia," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(4), pages 448-467, October.
    7. Tribo Gine, José Antonio & Surroca Aguilar, Jorge & Prior, Diego, 2007. "Earnings management and corporate social responsibility," DEE - Working Papers. Business Economics. WB wb062306, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    8. Jesus Sáenz González & Emma García-Meca, 2014. "Does Corporate Governance Influence Earnings Management in Latin American Markets?," Journal of Business Ethics, Springer, vol. 121(3), pages 419-440, May.
    9. badron, nur fateha, 2017. "Firm Performance And Risk In Real Estate Industry : Relationship Between Corporate Governance," MPRA Paper 78579, University Library of Munich, Germany.
    10. Richard Chung & Scott Fung & Szu-Yin Hung, 2012. "Institutional Investors and Firm Efficiency of Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 171-211, June.
    11. Dimitropoulos, Panagiotis E. & Asteriou, Dimitrios, 2010. "The effect of board composition on the informativeness and quality of annual earnings: Empirical evidence from Greece," Research in International Business and Finance, Elsevier, vol. 24(2), pages 190-205, June.
    12. Chung, Chune Young & Wang, Kainan, 2014. "Do institutional investors monitor management? Evidence from the relationship between institutional ownership and capital structure," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 203-233.
    13. Stergios Leventis & Panagiotis Dimitropoulos, 2012. "The role of corporate governance in earnings management: experience from US banks," Journal of Applied Accounting Research, Emerald Group Publishing, vol. 13(2), pages 161-177, September.

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