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Institutional ownership and monitoring: Evidence from financial misreporting
Authors:Natasha Burns  Simi Kedia  Marc Lipson
Institution:1. College of Business & Entrepreneurship, The University of Texas Rio Grande Valley, Edinburg, TX 78539, USA;2. Haub School of Business, Saint Joseph''s University, Philadelphia, PA 19131, USA;3. School of Business, State University of New York at Oswego, Oswego, NY 13126, USA;4. Craig School of Business, Missouri Western State University, St Joseph, MO 64507, USA;1. Nanyang Business School, Nanyang Technological University, Division of Banking and Finance, Singapore 639798, Singapore;2. Business School, University of Adelaide, 10 Pulteney Street, Adelaide 5005, Australia;3. Korea University Business School, Korea University, 145 Anam-ro, Seongbuk-gu, Seoul, Republic of Korea;1. College of Business, University of South Florida Sarasota-Manatee, Sarasota, FL 34243, USA;2. Department of Finance, College of Business Administration, California State University San Marcos, San Marcos, CA 92096, USA;3. School of Business, University of Washington, Bothell, WA 98011, USA
Abstract:We find that the likelihood and severity of financial misreporting is positively related to aggregate institutional ownership and this effect can be largely attributed to ownership by institutions with short investment horizons — those with little incentive to engage in costly monitoring of firm activities and precisely those that sell at the announcement of a restatement. We also find that the concentration of holdings by these institutions offsets this effect, which suggests concentrated ownership induces greater monitoring and mitigates the incentives for firms to misreport. Our results suggest that any link between myopic firm decision making and institutional ownership may be related to the nature of institutional monitoring.
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