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Institutional ownership, earnings management and earnings surprises: evidence from 39 years of U.S. data

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  • Justin G. Davis
  • Miguel García-Cestona

Abstract

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.

Suggested Citation

  • Justin G. Davis & Miguel García-Cestona, 2023. "Institutional ownership, earnings management and earnings surprises: evidence from 39 years of U.S. data," Journal of Economics, Finance and Administrative Science, Emerald Group Publishing Limited, vol. 28(56), pages 218-236, November.
    • Handle: RePEc:eme:jefasp:jefas-01-2023-0021
    DOI: 10.1108/JEFAS-01-2023-0021
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    More about this item

    Keywords

    Financial reporting quality; Institutional investor ownership; Earnings management; Earnings surprises; Corporate governance; Nonlinearity; G23; G32; G34; M41;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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