Do institutional investors reinforce or reduce agency problems? Earnings management and the post-IPO performance

This study investigates the dual roles of institutional investors in earnings management during initial public offerings (IPOs). Research suggests that institutional investors play a monitoring role in the corporate governance of firms by mitigating earnings management to reduce agency problems. However, institutional investors have incentives to opportunistically maximize their wealth by manipulating earnings when firms engage in IPOs. Results suggest that institutional investors facilitate accrual-based earnings management before IPOs but restrain earnings management after their issuance. We also find that firms with high institutional ownership experience superior post-IPO stock returns and operating performance, thereby suggesting that the capital market positively prices the monitoring function of institutional investors after IPOs, and the performance of these firms is improved. Our results are robust to controlling the endogeneity problem of institutional investors and further identifying active institutional investors.     

Earnings Announcements: Good News for Institutional Investors and Short Sellers

In this paper, we consider the trading behavior of institutional investors and short sellers around earnings announcements. The results suggest that institutional investors, and to a lesser extent short sellers, successfully anticipate earnings news. In the period immediately after the earnings announcement, both types of traders are active in the market and trade in response to the earnings announcement. In particular, short sellers are quick to increase their short positions when a company releases bad news. Institutional traders also trade in response to the news; however, they take longer to react.     

Institutional investors and bank governance: An international analysis of bank earnings management

Despite the growing importance of institutional investors in global capital markets and the link between bank earnings management and financial crash risk, little is known about the role of institutional investors in mitigating bank earnings management. We conduct the first international analysis of this issue using a broad sample of banks and institutional investors. We find a negative relation between institutional ownership and bank earnings management, after controlling for the stringency of a country's bank regulations and other relevant bank and country characteristics. Additionally, institutional ownership is more negatively related to earnings management in countries with more-stringent bank disclosure requirements or when ownership is held by domestic rather than foreign institutional investors. Institutional ownership is also more negatively related to earnings management in countries in which insiders extract more private benefits or when ownership is held by institutional blockholders. Our findings have important policy implications regarding institutional investors' engagement with banks.     

On the association between institutional ownership and aggressive corporate earnings management in Australia

This study examines the association between institutional ownership and Australian firms' aggressive earnings management strategies. In contrast to similar studies, this study does not assume that the two views on how institutional ownership associates with firms' earnings management behaviour are mutually exclusive. The association between institutional ownership and firms' income increasing discretionary accruals is expected to vary as the level of institutional ownership increases. The results support the predicted non-linear association between institutional ownership and income increasing discretionary accruals. In particular, a positive association is found at the lower institutional ownership levels, consistent with the view that transient (short-term oriented) institutional investors create incentives for managers to manage earnings upwards. On the other hand, a negative association is found at the higher institutional ownership levels, consistent with the view that long-term oriented institutional investors' monitoring limits managerial accruals discretion. These findings suggest that institutional investors can act as a complementary corporate governance mechanism in mitigating myopic aggressive earnings management by corporations when they have a sufficiently high ownership level.     

Institutional ownership and the informativeness of disclosure tone

Disclosure tone is an important qualitative characteristic of managerial disclosures. There is mixed evidence on the role of tone in disclosure strategy. While some studies highlight the informativeness of disclosure tone, other studies provide evidence consistent with an information obfuscation role. We conjecture that the mixed evidence may be because prior studies have not explicitly modeled the role of oversight over managerial disclosure. Using an exogenous shock to institutional ownership, an important source of managerial oversight, we find that abnormal disclosure tone is informative of a firm's future earnings and cash flows when institutional ownership is high. This positive association between institutional ownership and informativeness of abnormal tone is stronger when there is an increase in quasi-indexer institutional ownership and the contemporaneous performance is negative. Collectively, the results highlight a more complex role for disclosure tone. Abnormal disclosure tone could be reflective of managerial sentiment and convey forward-looking information to investors in the presence of greater oversight over managerial actions.     

Capital market pressure,real earnings management,and institutional ownership stability - Evidence from Poland

This study investigates whether and how institutional ownership stability influences real earnings management. We find that institutional investors holding stable equity stakes play an important monitoring role in reducing real earnings management by managers pressured by capital market forces to “meet or beat” earnings targets. We also document no relationship between institutional ownership stability and real earnings management in companies with entrenched managers protected from capital market pressure by a dual-class ownership structure. Our findings of the negative association between real earnings management and institutional ownership stability also indicate that firms with more stable ownership are engaged in lesser sales manipulation and overproduction. In addition, we reveal that pressureresistant institutions (pension funds and mutual funds) that reduce real earnings management are an essential part of the external governance mechanism in an emerging economy.     

机构投资者持股能提高上市公司会计信息质量吗?——兼论不同类型机构投资者的差异

本文以2006-2009年深圳A股上市公司为研究样本,实证检验了机构投资者总体以及各类型机构投资者持股对会计信息质量的影响。结果发现,机构投资者总体持股降低了财务报告可靠性,但能提高信息披露透明度。分类来看,证券投资基金、保险公司、社保基金和QFII等持股不影响财务报告可靠性,但能提高信息披露透明度;一般法人持股降低了财务报告可靠性,特别是加大了公司向下盈余管理程度,但不影响信息披露透明度;信托公司持股既不会影响财务报告可靠性,也不会影响信息披露透明度。结果表明,不仅机构投资者总体对上市公司会计信息质量影响的渠道不同,而且不同类型机构投资者对上市公司会计信息质量影响的渠道也存在差异。     

Institutional stakeholdings and better-informed traders at earnings announcements

Utama and Cready [Utama, S., Cready, W.M., 1997. Institutional ownership, differential predisclosure precision and trading volume at announcement dates. Journal of Accounting and Economics 24, 129–150] use total institutional ownership to proxy for the proportion of better-informed traders, an important determinant of trading around earnings announcements. We argue that institutions holding small stakes cannot justify the fixed cost of developing private predisclosure information. Also, institutions with large stakes generally do not trade around earnings announcements since they are dedicated investors or face regulations that make informed trading difficult. However, institutions holding medium stakes have incentives to develop private predisclosure information and trade on it; we show that their ownership is a finer proxy for the proportion of better-informed traders at earnings announcements.     

Foreign and Local Institutional Ownership and the Speed of Price Adjustment

Abstract:  This paper examines the relation between the speed of price adjustment and stock ownership by foreign and local institutional investors using data from the Korean stock market. We show that returns of stocks with high foreign institutional ownership lead returns of stocks with low foreign institutional ownership, especially after foreign ownership restriction is lifted. Likewise, returns of stocks with high local institutional ownership lead returns of stocks with low local institutional ownership. These results support the idea that foreign institutional (local institutional) investors have faster access to or processing power of new information than local institutional (local individual) investors.     

Passive Institutional Ownership,R2 Trends,and Price Informativeness

A distinctive trend in the capital markets over the past two decades is the rise in equity ownership of passive financial institutions. We propose that this rise has a negative effect on price informativeness. By not trading around firm‐specific news, passive investors reduce the firm‐specific component of total volatility and increase stock correlations. Consistent with this hypothesis, we find that the growth in passive institutional ownership is robustly associated with the growth in market model R²s of individual stocks since the early 1990s. Additionally, we find a negative relation between passive ownership and earnings predictability, an informativeness proxy.     

How efficient ownership structure monitors income manipulation? Evidence of real earnings management among Malaysian firms

This study investigates income manipulation through real earnings management, by listed companies in Malaysia, prior to being officially designated as “financially distressed”, by this country’s stock exchange listed rules. The hypotheses relate to whether the degree of upwards real earnings management, conducted during the four-year period prior to financial distress, can be explained by ownership structure (measured with three variables: managerial ownership, institutional ownership and foreign ownership). Using a sample of 1180 firm-year observations of financially distressed companies, over the investigation period 2001–2011, the findings suggest that the degree of real earnings management is not associated with ownership by management or institutional investors. Conversely, the evidence indicates that foreign shareholders are able to constrain upwards real earnings management related to discretionary expenditure but not the operating cycle. This study contributes to the importance of diversity of ownership structures in monitoring income manipulation among firms.     

Motivated monitoring by institutional investors and firm investment efficiency

We find that motivated monitoring by institutional investors mitigates firm investment inefficiency, estimated by Richardson's (2006) approach. This relation is robust when using the annual reconstitution of the Russell indexes as exogenous shocks to institutional ownership during the period 1995–2015 and after classifying institutional ownership by institution type. We also show that closer monitoring mitigates the problem of both over‐investing free cash flows and under‐investment due to managers’ career concerns. Finally, we document that the effectiveness of the monitoring by institutional investors appears to increase monotonically with respect to the firm's relative importance in their portfolios.     

Family control,multiple institutional block-holders,and informed trading

This paper investigates how large family shareholders and institutional block-holders jointly influence informed trading and firm valuation in the Hong Kong stock market. It combines market microstructure research with studies on the governance roles of multiple block-holders and finds that institutional block-holders rely on their relative controlling power vis-à-vis family owners to mitigate problems associated with informed trading. They also use their ownership rights to improve the structure of informed trading. However, these governance roles are predominantly exercised by pressure-resistant institutional block-holders. Informed trading reduces firm valuation, while an improvement in its structure increases valuation. Therefore, the governance roles of controlling families and pressure-resistant institutional block-holders may have different implications in terms of investors’ perceptions of private information risk.     

Earnings Behaviour of Financially Distressed Firms: The Role of Institutional Ownership

Using a sample of 859 U.S. bankruptcy-filing firms over the period 1986–2004, we examine the earnings behaviour of managers during the distressed period by looking at sources of abnormal accruals prior to the bankruptcy-filing year. Results show that managers of highly distressed firms shift earnings downwards prior to the bankruptcy filing. We test and provide evidence in support of two potential contributing factors. First, top-level management turnover among distressed firms leads new managers to earnings bath choices during the distressed period. Second, qualified audit opinions exert pressure on managers to follow more conservative earnings behaviour during the distressed period. Evidence is also provided that the management of distressed firms with lower (higher) institutional ownership has greater (lesser) tendency to manage earnings downwards. Results also show that higher institutional ownership mitigates the negative abnormal returns of firms with top management turnover. To the authors' knowledge, this is the first study that attempts to examine whether institutional ownership relates to market reaction in conjunction with a top management turnover or a qualified audit opinion during the distressed period. Prior studies focused on the investigation of earnings management or institutional ownership (separately) during the distressed period, but did not examine if the effect of institutional ownership on earnings behaviour also influences subsequent returns. Thus, the results of this study should be of interest to analysts, standard setters and regulatory bodies since our results show that management turnover, qualified audit opinions and firm governance mechanisms affect the quality of earnings and the level of abnormal returns.     

Institutional investors and earnings management associated with controlling shareholders' promises: Evidence from the split share structure reform in China

We examine the effectiveness of institutional investors in constraining aggressive earnings management induced by strong contractual incentives. To this end we focus on the consequences of earnings-related promises (covenants) negotiated between corporate controlling shareholders and minority shareholders during China’s split-share structure reform, wherein failure to achieve profit benchmarks had the potential to transfer significant wealth from controlling to minority shareholders. Our initial analysis provides evidence that profit-promised firm-years are, on average, associated with income-increasing earnings management, and that this association is stronger for: (i) firm-years in which the profit-promise was satisfied, and (ii) firm-years in which proxies for the level of unmanaged earnings suggest that earnings management was needed to satisfy the promise. However, such benchmark-beating behavior is weaker for firms with higher levels of institutional ownership. Further analysis documents that the exit threat of institutional shareholders can discipline earnings management associated with profit promises. We also show that the effect of institutional shareholders in reducing earnings management associated with profit promises is greater for domestic mutual funds and for privately controlled firms. Interestingly, our evidence suggests that institutional investors only play an effective monitoring role over earnings management when their incentives are strongly aligned with those of other minority owners. In other cases, our evidence suggests that these investors may exacerbate the level of earnings management.     

Foreign institutional investment horizon and earnings management: Evidence from around the world

This paper investigates whether and how the investment horizon relates to foreign institutional monitoring in constraining the self-interested managerial use of earnings management for a sample of firms from 29 countries. We find that equity ownership by long-term foreign institutional investors, irrespective of the strength of institutional controls in their home countries, is associated with lesser earnings management. Accounting for the significance of information asymmetry in earnings management and the ability of long-term foreign institutional investors to mitigate the information disadvantage associated with cross-border equity investments, we find that the constraining effect is stronger in firms with weaker information environments. Finally, using multiple proxies for the country- and firm-level agency, we find that monitoring by long-term, rather than short-term, foreign institutional investors is significantly effective in limiting earnings management in environments of severe agency conflicts. Overall, our findings draw attention to the heterogeneity in the monitoring role played by foreign institutional investors in influencing the financial reporting quality.     

Financial institutional blockholders and earnings quality: Do blockholders contestability and countries' institutions matter?

We examine the relationship between financial earnings quality and block ownership by institutional investors. This relation is vital given the tremendous growth of institutional ownership and the significant influence of large institutional blockholders on financial earnings quality. Our findings indicate that the presence of institutional blockholders drives higher financial earnings quality. Results from an instrumental variable (IV) approach suggest our documented effects are directional. Next, cross-sectional tests prove that the relationship is more pronounced among firms adopting IFRS and those in countries with minority shareholder protection. Moreover, our results reveal that property rights and the lack of contestability partially mitigate the positive association between institutional ownership and earnings quality. Our findings inform the ongoing debate on the influence of institutional ownership on earnings, which institutional and regulatory dimensions affect earnings, and through what channels these effects run. Overall, our results suggest that beyond corporate governance practices that enhance financial earnings quality, different countries' institutions and regulations settings influence the relation of institutional ownership to earnings quality.     

Institutional Ownership,Diversification, and Riskiness of Bank Holding Companies

We examine the relationship among the level and stability of institutional ownership, diversification, and riskiness of publicly traded bank holding companies. We find that large and stable institutional ownership is associated with a higher (lower) level of geographic, revenue, and nontraditional banking (asset) diversification and lower risk, suggesting that institutional investors are prudent and favor risk‐reducing diversification strategies. The association between institutional ownership level and diversification is more pronounced under deregulation and during the crisis, suggesting a substitution effect between regulation and market discipline, and a greater level of monitoring and/or advising by institutional investors during the crisis, respectively.     

Differences in CEO compensation under large and small institutional ownership

I examine the influence of large and small institutional investors on different components of chief executive officer (CEO) compensation, using US data for 2006–2015. An increase in large institutional ownership reduces total pay and current incentive compensation (i.e., options, stocks, bonus pay), whereas small institutional investors lower long‐term incentive pay (i.e., pension, deferred pay, stock incentive pay). These findings are consistent with managerial agency theory and the substitution of incentive pay by institutional monitoring. The effects are stronger for higher ownership levels and firms with weak governance, less financial distress, long‐tenured CEOs, multiple segments, and more free cash flow.     

Social trust and foreign ownership: Evidence from qualified foreign institutional investors in China

We investigate the effects of social trust on foreign institutional investors’ equity holdings in listed Chinese firms from 2005 to 2011. We find that social trust embedded in the regional environment is an important factor for the investment decisions of foreign institutional investors. We also find that the proportion and likelihood of foreign ownership increases with the level of social trust. The results support the notion that social trust and trust-related information help mitigate informational barriers in international equity investments. Our results are robust to alternative measures of social trust and a range of model specifications, including instrumental variable estimation. We document that the effects of social trust on foreign ownership diminishes in the presence of organizational learning, better formal institutional development, conservative financial reporting, and asset transparency. We also show that foreign institutional investors from countries with a common law origin are more likely to incorporate trust-related information in their investment decisions.