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Institutional ownership and the quality of earnings
Abstract
This study is designed to provide insights into the monitoring role of institutional investors by examining whether institutional ownership affects the quality of reported earnings. In addressing this issue, we develop a multidimensional method of measuring earnings quality using the Financial Accounting Standards Board's (FASB) conceptual framework as a basis. The results demonstrate significant evidence of a positive association between institutional ownership and earnings quality. In addition, the results indicate that concentrated institutional ownership may negatively affect earnings quality.
... Indeed, controlling shareholders have strong incentives (and the potential ability) to monitor managers, thereby mitigating agency conflicts (Grossman & Hart, 1988). Various studies document that controlling shareholders, either individuals, families, or institutional investors, are related to more effective monitoring, and thus to a lower EM propensity by top managers (e.g., Cascino et al., 2010;Hartzell & Starks, 2003;Velury & Jenkins, 2006). As such, one might expect large shareholders to mitigate the negative impact of the plural form on financial reporting quality. ...
... Chang et al. (2016) argue that significant institutional ownership increases the probability and effectiveness of monitoring since institutions who have a large corporate stake have access to the board and/or the management. Consequently, they are able to put pressure on other board members and executives to act in their own interest (Hartzell & Starks, 2003;Velury & Jenkins, 2006). ...
... Investigating publicly-traded U.S. tourism companies, Ozdemir (2020, p. 2) states that, "from a control standpoint, institutional ownership in a company increases the external monitoring on the management as well as on the board of directors […]." Following this perspective, previous literature shows that higher institutional ownership is associated with reduced EM practices and higher earnings quality (e.g., Kałdoński et al., 2020;Velury & Jenkins, 2006). 9 ...
This paper analyzes how the plural form business strategy (i.e., simultaneously pursuing a fee-oriented and an equity-based strategy) impacts financial reporting quality of international hospitality firms. Drawing on the agency theory perspective, we analyze a sample of global hospitality companies over 2010-2019 using OLS, entropy balancing, and Heckman two-stage estimations. Our results suggest that greater use of the plural form is positively associated with higher earnings management (i.e., lower financial reporting quality). The plural form induces financial reporting complexity, which increases the likelihood of earnings management. However, the presence of large shareholders, aiming at reducing earnings management practices for reputation purposes, offsets this effect. This study identifies a specific feature of the hospitality industry, namely the pursuit of the plural form business strategy, as triggering more complexity, which results in detrimental lower reporting quality for investors.
... Furthermore, institutional investors have the opportunity, means, and capacity to keep an eye on executives. Institutional investors are thought to have more financial expertise and larger financial stakes, which gives them a greater ability to EM (Schipper, 1989;Velury & Jenkins, 2006). The aforementioned arguments suggest institutional investors with larger ownership interests desire to hold onto their shares in investee companies as well as the motivation and responsibility to aggressively monitor and penalize managerial behavior that is narrow-minded (Velury & Jenkins, 2006). ...
... Institutional investors are thought to have more financial expertise and larger financial stakes, which gives them a greater ability to EM (Schipper, 1989;Velury & Jenkins, 2006). The aforementioned arguments suggest institutional investors with larger ownership interests desire to hold onto their shares in investee companies as well as the motivation and responsibility to aggressively monitor and penalize managerial behavior that is narrow-minded (Velury & Jenkins, 2006). A large percentage of institutional investors' ownership makes it more expensive to exit underperforming portfolio companies because large block sales typically involve large discounts (Black & Coffee, 1994;Rajgopal & Venkatachalam, 1997). ...
... Gerged et al., (2021) observed a negative relationship between the proportion of institutional ownership and earnings manipulations using a sample of 100 Jordanian listed firms from 2010 to 2014 (500 firm-year observations). Using a sample of 4238 firm-year observations from all firms listed in the Compact Disclosure, Compustat and CRSP databases from 1992 -1999. Velury and Jenkins (2006) found a significant positive link between institutional ownership and earnings quality, which implies less EM. Lin and Manowan (2012) studies a sample of 18,969 firm year observations drawn from active US firms on Compustat over the period 1996-2001. ...
Purpose
The purpose of this study was to examine the moderating role of institutional ownership on the relationship between board gender diversity and earnings management (EM) among listed firms in East African Community (EAC) partner states.
Design/methodology/approach
The study used a sample of 71 firms listed in the EAC partner states over 2011–2020. Data were handpicked from the individual firm's audited annual financial reports. Based on the results of the Hausman test, the study used the results of the fixed-effect regression model to test the hypotheses. To test the robustness of the results, the study employed an alternative measure of EM and two additional econometric techniques, including the pooled ordinary least squares (OLS) and the system generalized method of moments (GMM).
Findings
The empirical findings revealed that female directors improve the board's effectiveness in monitoring managerial roles. Specifically, the results showed a significantly negative relationship between the proportion of women in the corporate board and EM (as measured by discretionary accruals (DAs)). The findings further revealed an inverse relationship between the proportion of institutional ownership and EM. Finally, the results further demonstrated that institutional ownership enhances the role of board gender diversity in mitigating EM among listed firms in the EAC.
Practical implications
The findings of this study may be useful to managers, investors and regulators in assessing the role of institutional ownership and women's participation on corporate boards as a strategy for alleviating unethical manipulation of earnings.
Social implications
The findings of this study contribute to the growing concern on gender inequality, especially the marginalization of women from the paid labor force and decision-making. The findings highlight the importance of having more women in the corporate board since this may help in mitigating corporate fraud. Similarly, the findings highlight the importance of institutional ownership as a corporate governance (CG) tool.
Originality/value
Previous studies have reported mixed empirical results on whether board gender diversity mitigates EM. To the best of the author's knowledge, this is the first paper to fill the existing gap by exploring whether institutional ownership moderates the relationship between board gender diversity and EM among listed firms in the EAC.
... Berdasarkan tinjauan literatur yang telah dilakukan, beberapa penelitian telah membahas mengenai berbagai determinan yang berpengaruh terhadap kualitas laba dalam konteks internasional seperti tata kelola perusahaan (Alves, 2014;Velury & Jenkins, 2006;Yu, 2008), kepemilikan keluarga (Wang, 2006;Kim & An, 2019), tanggung jawab sosial perusahaan (Alsaadi et al., 2017;Siue & Wang, 2019), laporan terintegrasi (Obeng et al., 2020), koneksi politik (Hashmi et al., 2018), kecakapan manajerial Li, 2014), dan implementasi IFRS (Liu & Sun, 2015). Selanjutnya, berbagai penelitian yang telah dilakukan di Indonesia dalam menguji pengaruhnya terhadap kualitas laba di antaranya meliputi tata kelola perusahaan (Yushita et al., 2013;Budianto et al., 2018;Polimpung, 2020;Saksessia & FIrmansyah, 2020), kecakapan manajerial (Setin & Murwaningsari, 2018;Setyarini et al., 2020), rasio-rasio keuangan (Setiawan, 2017;Marpaung, 2019) Untuk meningkatkan kualitas laba yang dilaporkan, pemegang saham sebagai prinsipal perlu meminimalisasi praktik manajemen laba oleh manajer yang berperilaku oportunistik. ...
... Kedua jenis pemilik menggunakan informasi laba untuk membuat keputusan mereka. Beberapa literatur menunjukkan bahwa pemilik institusional dinilai lebih canggih dan aktif sehingga lebih mampu meningkatkan kualitas laba dibanding pemilik individu (Velury & Jenkins, 2006;Budianto et al., 2018). Namun, pemilik institusional jangka pendek dianggap dapat memberi tekanan pada manajer untuk mempraktikkan manajemen laba yang menurunkan kualitas laba, supaya mereka dapat membeli saham dengan nilai lebih rendah atau menjual investasi mereka dengan harga lebih tinggi (Yu, 2008). ...
... Karena posisi kepemilikannya yang menonjol, pemilik institusional, sebagai pemegang saham blok besar, berpotensi menjadi mekanisme tata kelola yang kuat. Pemilik institusional dinilai memiliki lebih banyak insentif untuk memantau tindakan manajer daripada pemegang saham individu atau minoritas, kapasitas kolektif membuat pemantauan lebih hemat biaya bagi pemilik institusional (Velury & Jenkins, 2006). H1: Kepemilikan institusional berpengaruh positif terhadap kualitas laba Fungsi pengawasan yang dilakukan oleh dewan komisaris dipengaruhi komposisi dewan komisaris. ...
This study examines the effect of corporate governance mechanisms and managerial ability on earnings quality. There are three components of corporate governance discussed in this study, namely institutional ownership, independent board of commissioners, and audit committee. Earnings quality in this study is measured based on the value of discretionary accruals which indicate earnings management in the company. The research data is in the form of manufacturing companies listed on the IDX during the 2017-2019 period. Sample selection using purposive sampling method, obtained 105 samples so that the number of observations for 3 years becomes 315 observations. The analytical method used in this study is multiple linear regression panel data. The results of this study indicate that the independent board of commissioners has a positive effect on earnings quality, while institutional ownership and managerial ability have a negative effect on earnings quality. Meanwhile, the audit committee has no effect on earnings quality
... Therefore, earnings numbers are viewed as high quality when they enable investors to better estimate a firm's prospects (Hussainey, 2009). Moreover, the importance of the predictive nature of accounting earnings is manifested when taking into consideration, for instance, the use of accounting earnings in the valuation of a firm's equity, which requires investors to anticipate the firm's expected future cash flows (Velury & Jenkins, 2006). ...
... The predictability of earnings reflects the ability of investors to estimate future cash flows. The significance of the predictive value of earnings figures appears in the use of accounting numbers in equity valuation, which requires the anticipation of expected future cash flows (Velury & Jenkins, 2006). Moreover, because the discounted present value of future cash flows is used by investors to value a particular firm, a strong future cash flows-current earnings relation can help investors assess the valuation of a firm via current earnings numbers (Ye, Zhang & Rezaee, 2010). ...
... Moreover, because the discounted present value of future cash flows is used by investors to value a particular firm, a strong future cash flows-current earnings relation can help investors assess the valuation of a firm via current earnings numbers (Ye, Zhang & Rezaee, 2010). Recently, several studies have introduced earnings predictability as a proxy for earnings quality (Atwood et al., 2010;Velury & Jenkins, 2006;Ye et al., 2010). In the studies, earnings numbers are considered high quality if they enable investors to anticipate the firm's prospects. ...
Earnings predictability is a measure of how well the past earnings of a firm can explain its current earnings. Earnings measurement is very important in accounting since the performance of the firm can be seen by a wide range of users. The primary role of the financial statement is to disclose the financial statement information to internal and external users in a timely and reliable manner. This study was to ascertain the relationship between firm attributes and earnings predictability of quoted manufacturing companies in Nigeria. The population of the study consisted of all the listed manufacturing companies in Nigeria for the year ending 2021. Purposive sampling was used to sample 12 manufacturing firms that were continuously listed and actively trading on the floor of the Nigerian Exchange Group (NXG) Ltd. during the period 2017 to 2021 and whose financial statements are available and have been consistently submitted to NXG for the period under study. The ex post facto research design was used to establish the effect of firm attributes on earnings predictability. The firm attributes reviewed were firm size, age, leverage and liquidity, while earnings predictability was measured by operational cash flows on total assets. Panel regression data using a pooled estimate of ordinary least squares method was used for data analysis. The result revealed that firm age, firm size, firm leverage and firm liquidity all have weak effects on the dependent variable. Based on the findings, it was concluded that firm attributes have weak but positive effects on earnings predictability. It was recommended that manufacturing companies should provide quality earnings reports stating the earnings per share, operational cash flow, and total assets. This will showcase the accrual quality which could assist investors in estimating future earnings thereby making decisions to avoid security mispricing.
... Previous research has applied communication theory to these issues. For instance, Smith and Smith [23]; Datejarutsri, et al. [24]; Li [26] and Velury and Jenkins [27] discovered that conventional audit reports, including footnotes are challenging for users to comprehend, limiting their usefulness and communication value. However, Datejarutsri, et al. [24] and Loughran and McDonald [25] discovered that KAM reports are more readable and easier to understand as evaluated using communication theory. ...
... To enhance the robustness of the regression model, several company characteristics were incorporated as control variables. These include Company Size (SIZE) as examined in studies by Suttipun [48] and Fera, et al. [4] others; Company Profitability (PROFIT) drawing from studies by Suttipun [48] and Pinto and Morais [8] company risk (RISK), as discussed by Suttipun [48]; Wuttichindanon and Issarawornrawanich [10] and Velte and Issa [11] company age (AGE) [27,49]. It is hypothesized that a positive correlation exists between the extents of KAM disclosure firm size and measured by the natural logarithm of total assets as larger companies typically require more extensive audit procedures. ...
This study aims to explore the relationship between Institutional Ownership (IO), auditor characteristics (Big 4), and Key Audit Matter (KAM) disclosure. It also analyzes IO and KAM disclosure by dividing the sample into subgroups based on the percentage of IO amount above or below the average institutional ownership of the firms. Data was obtained from annual reports collected from companies listed on the Indonesia Stock Exchange (IDX) in 2022 through the idx.co.id website using 649 observations, and analyzed using regression while content analysis was used to measure KAM disclosure. The research findings show that Big 4 has a positive relationship with KAM disclosure. However, no significant evidence was found to suggest that IO has a significant relationship with KAM disclosure during the observation period. This study underscores that the adoption of Auditing Standard (SA) 701 as part of an international initiative may improve financial reporting transparency, especially in firms audited by the Big 4 which tend to provide more comprehensive KAM disclosures. This research provides an important contribution for regulators, auditors, and policymakers to refine the corporate governance framework and auditing standards, ultimately leading to improved transparency and audit quality in emerging markets such as Indonesia. This study recommends refining KAM communication guidelines to further enhance transparency and reduce information asymmetry, especially for non-Big 4 firms and suggests that policymakers need to strengthen corporate governance mechanisms to improve audit quality.
... Monitoring conducted by investors with long-term ownership and high-level of ownership limits managers to earnings management. Velury and Jenkins (2006) using earnings quality measures based on the qualitative characteristics of financial statements, prove that there is a positive relationship between institutional ownership and earnings quality. However, there is a negative relationship between concentrated ownership and earnings quality. ...
... EQ in this study is using the measurement adopted by Velury and Jenkins (2006). This measurement is chosen because the consideration is more comprehensive. ...
Good Corporate Governance (CG) ensures the availability of better accounting information with higher transparency and accountability. Implementation of good CG in Islamic stock issuers should have a more positive impact than non-Islamic stock issuers as the former are selected based on a strong financial fundamental. This study aims to empirically examine the impact of CG on earnings quality. It also examines the impact of earnings quality on firm’s value. Thus earnings quality is considered as a mediating variable. This study uses the Structural Equation Model (SEM)-Partial Least Square (PLS). The final sample consists of 58 firms-years listed in Jakarta Islamic Index (JII) from 2008 to 2015. The study found that CG directly affects firm value with a positive direction. CG also increases earnings quality. The better the quality of CG, the better the quality of earnings. Then earnings quality increases firm value. In summary, earnings quality partially mediates the relationship between CG and firm’s value. This study uses the Corporate Governance Performance Index (CGPI) published by IICG (the Indonesian Institute for Corporate Governance) as the indicator of corporate governance quality. Predictability, neutrality, timeliness, and earning smoothness are used as the indicators of earnings quality. Tobin’s Q and corporate social performance represent firm value.
... In this sense, institutional investors prioritize corporate managers to focus on long-term profitability rather than worrying about managing results to achieve immediate profits. This type of institutional investor acts as a monitoring mechanism, restricting the management of the income by investee companies (Bushee, 2001;Velury & Jenkins, 2006;Nia et al., 2017). ...
... It is noted that the presence of individual investors represents a different effect from that of institutional investors, validating the argument that the latter are more proficient than other investors in the analysis of financial statements and invested wealth (Velury & Jenkins, 2006). ...
The aim of the study is to analyze the influence of ownership structure on earnings smoothing practices in companies listed on B3. The analysis considered multivariate linear regression for a sample of 203 observations, with data referring to the period 2016-2021. The results indicated that the greater presence of international and institutional investors are factors that mitigate earnings smoothing practices. In turn, ownership concentration, government ownership and growth in the number of shareholders in the stock market did not prove to be determinants of income smoothing. The results suggest that the low participation of institutional and international investors may make it necessary to use additional corporate governance mechanisms.
... Based on the subject literature, timely earnings recognition has been assessed through several measurement methods. However, Velury [65] states that the gap between the end of the fiscal year and the date of information disclosure is the simplest method for measuring timely earnings recognition. The larger the gap, the lower the quality of reported earnings. ...
Earnings, as one of the most important outputs of the accounting and financial reporting system, are of great interest to various users for making appropriate decisions in resource allocation. In addition to its quantitative value, if earnings lack appropriate quality, it can lead stakeholders astray and result in misinformed decisions. According to research literature, there are numerous definitions and classifications of earnings quality (EQ) and financial reporting quality (FRQ), along with measurement criteria, but there is no general consensus among them. The criteria examined in this study include a total of eight criteria based on accounting (accruals, persistence, predictability, and smoothness) and market-based (value relevance, timeliness, and conservatism) perspectives. For this purpose, after reviewing the research literature in this field, the advantages and disadvantages of these criteria were explored and critiqued. Research in this area can contribute to the development and determination of an optimal model in the context of the Iranian capital market.
... Earnings management and media spin both allude to the conflict of interest that exists between the managers employed by enterprises to decide on investment projects and payouts and the firm's dispersed owner-investors since the ultimate purpose of both is to temporarily raise the share price of the company. According to earlier research, external corporate governance is crucial in preventing managers from handling abnormal accruals and enhancing the caliber of corporate earnings (Mitra & Cready, 2005;Velury & Jenkins, 2006). From this angle, one would anticipate that external governance would likewise lessen media spin since media spin is essentially a self-interested managerial practice. ...
This article examines the relationship between media tone and earnings management before the earnings announcement. Using data from China, I discover a positive relationship between media tone before the earnings announcement and earnings management. For companies whose managers sell their ownership in the next time and have prior media exposure, the beneficial relationship is more pronounced. The relationship between abnormal media tone before results declaration and earnings management appears to be weakened by external oversight. According to the findings, managers can use media slant in addition to earnings management as a way to increase stock price following an earnings announcement. I also find that managers may use two public channels to influence media tone before the earnings announcement: the distribution of preliminary accounting data and earnings pre-announcement. Our study expands on the media’s involvement in earnings management and offers proof of the concurrent use of multiple management techniques to artificially raise stock prices.
... These tightened nonprice contract terms signify that the economic effect of LGP on the effective cost of bank loans is likely even higher than that implied solely by the loan spread. Finally, we document that external corporate governance mechanisms, which enhance earnings quality (Velury and Jenkins 2006) and increase the threat of takeover (Cain, McKeon, and Solomon 2017), play a pivotal role in reducing the cost of bank loans. More importantly, these mechanisms also attenuate the positive influence of local gambling preferences on the cost of bank loans. ...
Our study explores the effect of local gambling preferences (LGP) on bank loan pricing, revealing that lenders impose significantly higher interest rates on firms situated in areas characterized by stronger gambling tendencies. Our results remain robust after conducting a series of sensitivity tests that account for firm-, county-, and loan-specific attributes, as well as several identification robustness checks. Specifically, our relocation analysis shows that firms moving to areas with higher (lower) gambling preferences experience higher (lower) costs of bank loans compared to control groups. Our channel analysis further reveals that local gambling preferences exacerbate a firm's information risk environment, as captured by poorer earnings quality, heightened earnings risk, and greater managerial concealment of bad news, resulting in higher borrowing costs. Finally, we observe that firms in areas with higher LGP encounter more stringent non-price loan terms. However, institutional ownership and the threat of takeovers significantly mitigate the adverse effect of LGP on bank loan pricing.
... In line with Cheng et al. (2016), this study contains the following control variables: firm size (Size), the age of the firm (Age), the leverage ratio (Leverage), the market-to-book ratio (MTB) and the return on assets (ROA). Drawing on previous studies (e.g., Broadstock et al., 2022;Cohen et al., 2008;Dechow et al., 1995;Roychowdhury, 2006;Velury & Jenkins, 2006), we identify the explanatory variables for firms' REM behaviour. This is because these studies argue that the percentage of institutional ownership (Institution), 'suspect firms' that have an ROA that is close to 0 (Suspect), and the level of AEM are related to REM. ...
We investigate the association between corporate digitalisation and firms' real earnings management (REM). Using an archival data set of 11,806 firm‐year observations from the Shanghai and Shenzhen stock exchanges between 2011 and 2020, our results show a negative association between the degree of corporate digitalisation and the level of REM. Furthermore, we find that the association between corporate governance mechanisms – including power balance, board independence and audit quality – and REM is more pronounced in firms with a high degree of digitalisation. We also note that the reduction of REM resulting from corporate digitalisation has a positive effect on firms' operating efficiency.
... Several studies (e.g., Velury and Jenkins 2006;Zhong et al. 2017;Alhadi et al. 2018;Hidayat and Utami 2022) indicated that the quality of earnings varies depending on institutional ownership. Additionally, some studies (e.g., Ferdi and Rossieta 2019;Cui 2021;Melati and Wijayanti 2022) suggest that institutional ownership may serve as a determinant of RPTs. ...
This paper seeks to investigate how earnings quality is affected by related party transactions (RPTs). The research also examines the impact of ownership structure as a moderating variable on this relationship. Panel data with the firm fixed effects model are utilized in the paper. A sample of 91 non-financial companies listed on the Saudi Stock Exchange between 2018 and 2022 were included, resulting in 429 observations of company performance over that time period. This paper finds that there is a negative association between RPTs and earnings quality. Furthermore, the study found that the adverse effect of RPTs on earnings quality is intensified when there is managerial ownership and institutional ownership as moderating variables. The study’s conclusions are robust and reliable, as the sensitivity analysis results reinforce those of the basic analysis. To the authors’ knowledge, there is relatively little available evidence on the connection between RPTs and their correlation with earnings quality, particularly in the context of ownership structure acting as a moderating variable. Moreover, the study’s findings hold important implications for enhancing earnings quality in developing economies. To the authors’ knowledge, no studies have been conducted in Saudi Arabia thus far to investigate the impact of ownership concentration, institutional ownership, managerial ownership, foreign ownership, and state ownership on the association between RPTs and earnings quality. Therefore, this paper expands the literature by modeling how the interaction between ownership structure and related party transactions may influence earnings quality. In this way, the authors contribute to the body of knowledge by unveiling a more robust control mechanism, particularly in developing economies with ineffective markets for corporate control.
... In this regard, the behavior of an overconfident CEO can be influenced by the presence of institutional investors. The latter are able to exercise their monitoring role, given their financial knowledge and independence criteria (Velury and Jenkins, 2006). Their active involvement in corporate governance and oversight activities can lead to improved financial reporting practices (Jung and Kwon, 2002). ...
Purpose
The purpose of this paper is to examine the effect of chief executive officer (CEO) overconfidence on earnings quality and the moderating role of ownership structure as a crucial corporate governance device.
Design/methodology/approach
The paper uses the generalized method of moments (GMM) estimation method to test our models on a sample of 335 French companies between 2009 and 2020, i.e. 4,020 observations.
Findings
The results show that CEO overconfidence negatively affects earnings quality. This result supports the predictions of behavioral finance theory and suggests that CEO overconfidence is a behavioral bias that affects the quality of earnings. The authors also examined the effect of different types of ownership structures on this relationship. The results show the significant role of controlling shareholders, owner-managers, families and institutional investors in mitigating the negative effect of CEO overconfidence on earnings quality.
Research limitations/implications
This paper has some limitations. First, other types of ownership structures could have been analyzed such as state ownership. Second, we ignored the role of the board of directors as an important governance mechanism in controlling overconfident CEOs’ actions.
Practical implications
Companies should be aware of the potential risks associated with CEO overconfidence, which can compromise the faithful representation of earnings. This highlights the importance of effective monitoring and internal controls to detect and prevent such practices, which involve the role of ownership structure.
Originality/value
This paper addresses the effect of CEO overconfidence on earnings quality and provides new evidence on the role of different ownership structure types in shaping this relationship. Additionally, this paper sheds new light on how overconfident CEOs may behave in challenging times.
... Robust corporate governance mechanisms play a crucial role in safeguarding the interests of both shareholders and stakeholders, ultimately enhancing company performance. These mechanisms ensure that managers act in the best interests of shareholders (21,22 who hold a substantial portion of corporate shares, have considerable influence and can mitigate agency problems (23,24). Institutional ownership encompasses shares held by banks, insurers, holdings, investment firms, pension funds, capital financing companies, government agencies, and governmental companies. ...
Background: Institutional owners influence the direction of policy and the performance of owned companies. This research was motivated by the presence of pharmaceutical companies in the Tehran Stock Exchange and the uncertainty surrounding the extent and influence of institutional owners on the policy direction and performance of the companies. Methods: This was a descriptive-analytical and cross-sectional study. The descriptive phase of the study involved measuring sales figures, market value, and market share of pharmaceutical companies listed on the stock exchange. In the analytical phase, the network of shareholders' relationships was analyzed with Gephi version 0.1 and Microsoft Excel version 6102, followed by the calculation of the capital concentration index and market share. Results: Estimates indicated that approximately 45% of the pharmaceutical companies in Iran were publicly traded in stock exchange. In 2020, the total value of these companies in the Iranian capital market reached 9.79 billion USD. Out of this amount, 45% (equivalent to 4.4 billion USD) was offered in Tehran Stock Exchange. The concentration of final shareholders, with a Herfindahl-Hirschman index(HHI) index of 0.036, signified a monopolistic competition market. On the other hand, the pharmaceutical capital market could be classified as an oligopoly market (with a value of 58.3) when analyzing only the direct shareholders at level 2. Additionally, the six main holding companies at this level collectively possess 67% of the pharmaceutical capital market. Conclusion: Based on the results, the importance of institutional owners, such as the Social Security Organization (SSO), in the decision-making process regarding the Iranian pharmaceutical market can be acknowledged. The decisions about integration and supply chains which aimed at improving the productivity of the pharmaceutical market, need to be thoroughly examined by the institutions mentioned in this research.
... It particularly discloses that the manipulation of both the discretionary accruals and real activities earnings would have an adverse effect on the creation of firm value in the future (Bhojraj et al., 2009;Cohen and Zarowin, 2010;Gunny, 2010;Kim and Sohn, 2013;Kothari et al., 2016;Li, 2010;Mizik and Jacobson, 2007;Teoh et al., 1998). The adequate monitoring of the institutional shareholders can ensure the report of high-quality In brackets, white heteroscedasticity-consistent standard errors, *** P=0.01, ** P=0.05, and * P=0.1 denote statistical significance at the 1%, 5%, and 10% levels, respectively earnings, which eventually raises the worth of the company over time (Hsu and Koh, 2005;Velury and Jenkins, 2006). As a result, our findings suggest that a better understanding of how business managers respond to temporarily reduced monitoring intensity could significantly improve corporate governance mechanisms for maximizing company value. ...
This study determines the extent to which loosening institutional shareholder monitoring intensity induces earnings management, thereby leading to accounting scandals. When there is intense monitoring of the corporate executives, their opportunistic tendencies are prevented, and corporate decisions align with the value-creation target. The study postulates that institutional shareholders' relaxed monitoring role positively and significantly impacts earnings management. The more robust Two-Step System GMM was used to analyse the collected data of companies listed on the Johannesburg Stock Exchange (JSE) for 15 years from 2004 to 2019. The finding revealed that slack institutional shareholders' control affects earnings management positively.
... Earnings management (EM) occurs when executives employ their discretion to interpret or structure a transaction so as to modify the financial statements, with the intention of either hiding the true performance from certain stakeholders or effecting contractual results dependent on such communicated accounting and financial information (Healy and Wahlen 1999). Intentionally manipulating accounting and financial information lowers its worth, preventing stakeholders from making wise and informed decisions (Velury and Jenkins 2006;Matis et al. 2010). EM brings the corporate entity's actual performance into doubt, reducing the shareowners' capacity to make prudent decisions and resulting in increased agency costs (Xie et al. 2003). ...
Manipulating real activities is generally regarded as more damaging to a firm’s long-term growth and value than accrual-based manipulations. We consider this point of view and build on the agency theory framework for investigating the role of independent directors’ (INDs’) tenure and connection to several boards in controlling real-earnings management (REM) practices. We analyze a sample of UK listed non-financial companies over the period between 2005 and 2018. The potential endogeneity issue was controlled by the application of the two-step system-GMM estimations. The research findings suggest that REM was lower in those firms whose INDs were connected to several boards at a time. The findings also show that the association between INDs’ tenure and REM varied with the phases of their tenure. Directors in the early stage of their tenure are less effective at controlling REM, however, as their tenure grew, they generate better oversight over the management conduct, thereby reducing REM. Contrary to this, extended tenure is shown as positively associated with higher REM practices. The overall findings thus suggest that the board monitoring role protects the stakes of the shareholders by constraining REM when INDs have better expertise and rich information acquired through their presence on multiple boards—and when they have moderate board tenure, which is neither too short nor too long. We argue that due to the importance of the role of INDs in the current global scenario this study has policy implications.
... The first opinion states that institutional ownership positively affects earnings quality. They play a role in the corporate governance mechanism, so they can potentially reduce management discretion [6], [7]. On the other hand, institutional ownership is more active in trading, so they are not actively involved in managerial control, which negatively affects earnings quality and increases earnings management [8]. ...
This study investigates the relationship between foreign institutional ownership (FIO) and earnings management (EM) using 552 firms of non-financial sector companies that publish annual financial reports for 2015–2021. We use ordinary least squares (OLS) for equation estimation. The results show that, overall, FIO has a negative impact on earnings management. Tests were also conducted on the FIO group: banks, insurance, pension fund mutual funds, and securities companies. The test results indicate that each group of institutional investors has a negative effect except for securities companies, which positively impact earnings management. The positive influence of securities firms shows that securities firms are more focused on trading strategies than managerial controls. The findings of this study are expected to contribute to the corporate governance literature and the quality of financial reporting. Institutional ownership as a corporate governance mechanism is expected to control earnings management which can reduce the quality of financial reporting. Keywords: institutional ownership, earnings management, agency theory
... Slack financial resources are measured using the cash flow from operations scaled by total assets. This measure reflects a firm's ability to generate internal cash from its core operations (Velury & Jenkins, 2006;Wasiuzzaman et al., 2022). Board attributes are assessed using three indicators: board gender diversity (BDIVERSITY), board tenure (BTENURE), and board skills (BSKILLS). ...
This study examined the impact of slack financial resources, board characteristics (such as gender diversity, tenure, and skill/expertise), and energy efficiency policies on firms' consumption of renewable energy. Using a dataset of 17,753 observations from 2002 to 2019, we primarily utilized fixed-effects regression, among other methods, for robustness analysis. We find that while slack financial resources, board gender diversity, and energy efficiency policies are positively associated with more renewable energy consumption, board skill is negatively associated with it. Interaction effects showed that firms with more female and tenured directors effectively utilize slack financial resources for increased renewable energy consumption , unlike firms with more expert directors. Energy efficiency policies enhanced the positive impact of female directors on renewable energy consumption but mitigated the influence of expert directors, weakening their association. K E Y W O R D S board attributes, energy efficiency policy, renewable energy, slack financial resources
... Prior studies suggest that firms with a high level of institutional ownership tend to provide less misleading financial reports, have good governance structure, and exhibit conservative financial reporting (Chung and Zhang, 2011;Ramalingegowda and Yu, 2012;Velury and Jenkins, 2006;Bushee et al., 2014). According to a recent study by Al-Qadasi et al. (2022), institutional investors prefer companies with high levels of financial reporting system quality when making investments. ...
Purpose: Institutional investors are major shareholders in publicly traded firms and play crucial roles in the financial and governance aspects of these firms. Despite their importance, little is known about their role in internal auditing. This study aims to fill this gap by investigating the relationship between institutional investors' ownership and investment in the internal audit function (IAF).
Design/methodology/approach: The study employs ordinary least squares (OLS) regressions with two-way cluster-robust standard errors (firm and year) to estimate the relationship between institutional investors' ownership and investment in IAF for Malaysian listed firms between 2009 and 2020.
Findings: The findings show that companies with higher levels of institutional ownership invest more in IAF, suggesting that institutional investors can effectively monitor managers due to their large holdings. Moreover, both transient and dedicated institutional investors are more likely to invest in IAF.
Originality/value: The results highlight the importance of institutional investors as a significant determinant of investment in IAF, which can aid regulators and managers in understanding the institutional investors' role in governing and optimizing the efficient use of a firm's resources. The findings also provide insight into institutional investors' behavior regarding monitoring systems, which may inspire regulators and policymakers to consider increasing institutional investors' participation to enhance governance structures.
... Ball et al. (2008) provide evidence that high-quality borrower accounting information reduces the information asymmetry between the lead lender and other syndicate participants. Bushee and Noe (2000) find that institutional owners are attracted to higher disclosure quality, and Velury and Jenkins (2006) find evidence that institutional ownership is associated with higher earnings quality. Chen, Dong, and Lin (2020) find that increases in institutional ownership are related to improved audit committee effectiveness, higher quality auditors, and improved quality of internal controls. ...
We study the effect of borrower-lender cross-ownership on the demand for a borrower’s external audit quality in syndicated loan settings. Cross-owners, which are institutional investors who hold the equities of both the borrower and the lead lender of syndicated loans, have the ability and incentive to increase the economic benefits accruing to both contracting parties. We hypothesize that cross-owners demand high-quality audits of the borrower’s financial information as a delegated monitoring device to resolve the agency cost of debt and improve contract efficiency. Our evidence shows that cross-ownership is positively associated with higher borrower audit fees, our proxy for audit quality. We also find that the effect is more pronounced for larger loans. Overall, these results suggest that cross-owners view external audits to be a viable monitoring mechanism for improving overall debt contacting efficiency.
Data Availability: Data are available from the public sources cited in the text.
JEL Classifications: M42; M48.
... Monitoring by institutional ownership can be an important governance mechanism (Velury and Jenkins, 2006). This is because institutional shareholders have quite good experience from issuers in managing the company, so high supervision by institutional owners can encourage management to improve the quality of financial information (Diab et al., 2023). ...
This study is a continued study in earnings quality, with the aim of analyzing the effect of ownership structure consisting of concentrated ownership, institutional ownership and foreign ownership on earnings quality. Manufacturing companies listed on the Indonesia Stock Exchange in 2014-2020 are the research population using purposive sampling. In addition to causal research by analyzing the respective effects of concentrated ownership, institutional ownership and foreign ownership on earnings quality, a sensitivity test was also conducted by comparing the effect of each independent variable on earnings quality with different measurement indicators, namely Performance Adjusted Accrual including Tax (PAiT), which is a new measurement developed by researchers and used in the main research model compared to the existing measurement, namely Performance Adjusted Dicretionary Accrual (PAccr). With the using of STATA in statistical analysis, this study found a negative effect of institutional ownership on earnings quality, while the opposite result was found on the effect of foreign ownership, although in this study there was no effect of concentrated ownership. These results are expected to contribute to investors who use earnings information in making investment policies, besides that the results of this study can be used as input for management in making company policies, especially in the preparation of financial information.
... Monitoring by institutional ownership can be an important governance mechanism (Velury & Jenkins, 2006). This is because institutional shareholders have quite good experience from issuers in managing the company, so high supervision by institutional owners can encourage management to improve the quality of financial information (Diab et al., 2021). ...
This study aim of analyzing the effect of ownership structure consisting of concentrated ownership, institutional ownership and foreign ownership on earnings quality. This study analyzes the effect of concentrated ownership, institutional ownership and foreign ownership on the earnings quality of Manufacturing Companies listed on the IDX in 2014-2020, and a sensitivity test by comparing different measurement of earnings quality, new and existing. By using STATA in statistical analysis, this study found a negative effect of institutional ownership on earnings quality, meaning that the role of institutional owners encourages management to reducing the earnings quality. The opposite result is found where foreign ownership has a positive effect on earnings quality, shareholders who are foreign people or agencies encourage management to provide earnings quality. Concentrated ownership was not found to have an effect on earnings quality. The results have practical implications for investors in making investment policies where the level of ownership, especially institutional owners and foreign owners. The results of this study also have theoretical implications regarding ownership structure and earnings quality prepared in financial reports by management. This study uses a new measurement as earnings quality, namely Performance Adjusted Accrual including Tax (PAiT) by adding tax elements, compared to the existing measurement, namely Performance Adjusted Discretionary Accrual (PAccr), in the sensitivity test it was found that the use of PAiT was better than PAccr, meaning that taxes have a role in earnings quality.
Management of earnings by corporate organisations has been one of the serious issues in literature of accounting over the past few years, the situation which involves manipulation of company earnings in order to achieve a desired outcome which may or may not reflect the true position of the organisation. This issue has gained the interest of scholars and has been investigated extensively across different industries. This study explores how ownership structure influences earnings management in Nigeria's paint and chemical industry. It investigates three main objectives: (i) the impact of managerial ownership on earnings management, (ii) the effect of institutional ownership on earnings management, and (iii) the relationship between ownership concentration and earnings management. Utilizing a quantitative research approach, the study collected secondary data from annual reports of listed companies in the sector from 2010 to 2021. Panel data analysis, including pool ordinary least squares, random, and fixed effe
Prior research states that during extreme uncertainties stock prices deviate from their fundamentals. This study examines the cross-section of share price returns during the COVID-19 and pre-COVID periods to determine how investors' reaction to prior earnings volatility is affected by the COVID-19-induced ambiguity. The sample consists of 840 firms listed on the New York Stock Exchange (NYSE) from January 1, 2020 to May 31, 2021. Consistent with the notion that ambiguity-aversion is not a universal phenomenon, COVID-period stock returns exhibit a positive (β = 0.23) and statistically significant relationship with prior earnings volatility. In contrast, the stable period returns show a very weak, if any, correlation with prior earnings volatility. The positive relationship is more pronounced for firms that experience greater information asymmetry. When comparing the results with previous research, it appears that different crises evoke varied levels of ambiguity-aversion possibly because of the ways in which each crisis's features and anticipated outcomes influence how the market reacts. Thus, before crafting responses to a crisis, policymakers and firms should thoroughly examine the crisis and identify the underlying causes, dynamics, and possible effects on decision-makers' ambiguity-aversion behavior.
Using a sample of Chinese A‐Share listed companies during 2018–2023, we explore the influence of visual annual reports (VARs) on stock price crash risk. The results suggest that VARs are negatively associated with crash risk, and several robustness and endogeneity examinations validate our primary findings. Mechanism analyses reveal that reduced information asymmetry and increased internal control quality may serve as potential pathways through which VARs influence crash risk. Additionally, cross‐sectional examinations suggest that the negative relation between VARs and crash risk is more pronounced for companies with poor annual report readability and limited external monitoring.
This study aims to test and analyze the effect of ESG disclosure, accrual quality,
and asymmetric information on future stock returns. In addition, testing and
analysis were carried out on models of the effect of ESG disclosure, accrual quality,
asymmetric information, environmental disclosure, social disclosure, and
governance on future stock returns moderated by prudence. Five control variables
were added to strengthen the model, including crash risk, leverage, growth
opportunities, prediction of financial distress, and company size. Using the
purposive sampling method, with company analysis units obtained 332 companies
during the 2017-2021 period. This study used a causality approach to examine the
effect of the independent variable and the moderating effect on the dependent
variable.
The results of this study, which consists of three models, show that the main
model has a positive effect of ESG disclosure on future stock returns, accrual
quality has a positive effect on future stock returns, asymmetric information has a
negative effect on future stock returns and prudence strengthens the effect of ESG
disclosure on future stock returns and weakens the effect of asymmetric information
on future stock returns. For the sensitivity model, ESG disclosure has a positive
effect on future stock returns, accrual quality has a positive effect on future stock
returns, and asymmetric information has a negative effect on future stock returns.
In addition, consistent with the main model, prudence weakens the effect of
asymmetric information on future stock returns. While testing the third model,
namely the expansion test that breaks down ESG disclosure into each disclosure,
namely environmental, social, and governance, environmental disclosure, and
governance disclosure have a positive effect on future stock returns. accrual quality
has a positive effect on future stock returns and asymmetric information has a
negative effect on future stock returns and prudence strengthens the effect of
governance disclosure on future stock returns and weakens asymmetric information
on future stock returns.
This research has significance in the development of models for prudence
variables in the context of PSAK 57 or IAS 37. The limitation of this research is that
the sample studied has a limited number because few companies in Indonesia
publish sustainability reports, in addition to regulations related to the obligation to
submit new sustainability reports that are mandatory in 2022.
This study investigates the impact of family ownership and supervisory board characteristics on audit report lag in Indonesia. The study relies on a balanced panel dataset and matched-pair sample of 124 listed non-financial firms (2017–2019) in a two-tier board context, drawing on Type II agency theory and the entrenchment/alignment implications of ownership concentration. First, we find a positive and significant association between family ownership and audit report lag. Second, we find evidence that the size of the supervisory board (locally referred to as the board of commissioners) and the frequency of meetings are negatively associated with audit report lag. Further analyses reveal that firms with a larger proportion of family members on the supervisory board experience longer reporting lag. This finding highlights the family’s entrenchment and their domination of the board of commissioners. Additional analysis considering the commissioners’ backgrounds reveals that audit report timeliness worsens when there is a larger proportion of community leadership. This suggests that some commissioner profiles could further lead to entrenchment behaviors. Our findings contribute to the literature and to policy by highlighting the potential and limits of a two-tier board policy on accounting outcomes, particularly in the context of dominant family structures in emerging economies.
This study looks into a theoretical model exploring the effects of ownership shares and directors’ proportions as majority shareholders on earnings management. Furthermore, the primary objective of this research is to investigate the moderating role of board meeting frequency between ownership shares and directors’ proportions as majority shareholders on earnings management. The current study employed a quantitative research methodology, using firms in Iraq from 2013 to 2018. In panel data regression, the researchers implemented three distinct models: the random effect model, the fixed effect model, and the common pooled model. The data were provided in two columns, one with control variables and one without control variables. This study also presents empirical evidence that ownership of shares by directors and majority shareholders was significant, implying that an increased number of shares possessed by directors and high majority shareholders would reduce earnings management. While the frequency of board meetings had no significant moderating effect on the relationship between director share ownership and earnings management, it did play a significant moderating role in the relationship between directors’ proportion as majority shareholders and earnings management. Finally, the contribution of these empirical findings as research makes a valuable addition to the existing body of academic literature on earnings management, particularly within the context of the Iraq earnings management scenarios. It also has the potential to make a meaningful contribution towards mitigating the prevalence of earnings management practices. Moreover, it offers unique insights into the significance of corporate governance in the context of Iraqi financial institutions.
This study investigates institutional distance as a factor of investors’ monitoring of corporate earnings attributes. We analyze the US cross‐listing market to determine whether institutional monitoring depends on geographic or market proximity. We find that shareholdings of non‐US institutions headquartered in the same country as the investee firm are significantly and positively related to earnings quality. However, we do not find such a monitoring role in the United States, or in institutions not incorporated in the investee firm's home country. Our findings support a geographic proximity advantage over market proximity, which is more pronounced when firms’ information opacity is more severe; the results are not altered by the choice of earnings attribute variables.
This article examines the relationship between institutional investment stability and the reliability of financial reporting. The sample consists of all publicly traded firms on the Indian market from 2013 to 2021. The size of Institutional investment and its stability are used to regress discretionary accruals. The article also investigates whether the scale of institutional investment, its long-term stability, or both contribute to effective monitoring that limits discretionary accruals. The findings indicate that the persistence of institutional investment and large-scale investment significantly restrict discretionary accruals. This indicates that large institutional investments and their stability improve the quality of financial reporting. However, the monitoring is ineffective when the size of institutional investment is small and/or the persistence of institutional investment is low. Institutional investors can effectively monitor large-scale investments and the persistence of their investments. In the context of promoters pledging shares, neither the size of institutional investment nor its persistence can reduce discretionary accruals. This indicates increased pressure on managers to adopt earnings management when promoters’ shares are pledged. The results also demonstrate that operating assets, operating cycle, and leverage provide more opportunities for earnings management. Conversely, firm size is negatively associated with discretionary accruals. This article is the first to examine the impact of institutional investment stability on accrual management. It offers valuable insights into evaluating corporate reporting quality dynamics, considering the evolving role of institutional investors in the corporate governance of their investee firms.
We examine how uncertainty about a firm's future cash flows influences the quality of its accounting information. As uncertainty increases, information asymmetry between managers and stakeholders will almost certainly increase, amplifying the potential influence of uncertainty. We focus on a specific setting where severe levels of uncertainty can influence financial reporting, the property‐casualty (P&C) insurance industry and use catastrophes as a shock to the level of uncertainty regarding P&C insurer's future cash flows. We use P&C firms’ claim loss estimation errors as a proxy for accounting information quality. Results suggest that, in times of heightened uncertainty, managers respond by increasing accounting information quality. Moreover, managerial claim loss forecasts are more accurate for publicly traded P&C firms relative to privately—or mutually—owned P&C firms as catastrophe exposure increases. Additionally, claim loss estimates are incrementally more accurate in times of heightened uncertainty for public P&C firms with higher institutional ownership or analyst following. These results corroborate the conjecture that managers’ decisions to provide more accurate forecasts in times of heightened uncertainty are attributable to an increased demand for better information by external stakeholders.
Purpose
Accounting scandals and earnings management problems at large firms such as Global Crossing and Enron have resulted in lots of wealth loss not only to corporate investors but also led tremendous damage to societies. Hence, policymakers and academic researchers have started to explore mechanisms to prevent improprieties in financial reporting and further enhance firm value. Using data from United States (US)-listed companies between 2000 and 2018, this article explores the effect of ex-military executives on earnings quality, the role of financial analysts in their interplay and the firm value implication of earnings quality driven by ex-military executives.
Design/methodology/approach
This study employs a firm fixed-effects model to validate the main conjecture and adopts the weighted least squares, Granger causality analysis, instrumental variable approach, propensity score matching, entropy balancing approach and dynamic system Generalized Method of Moments (GMM) estimator to address robustness and endogeneity issues.
Findings
Authors reveal that companies run by ex-military senior executives exhibit lower levels of accruals-based and real earnings management than those without. The effect of management military leadership on constraining earnings management is more prominent for companies with low analyst coverage, suggesting that the military experience of executives could be a substitute for external monitoring. Authors also find that these ethical managers alleviate the negative impact of earnings management on firm value and that companies managed by these managers exhibit higher firm performance.
Practical implications
This study highlights the importance of the intrinsic motivation behind the effect of military experience on senior managers' personalities and offers essential stakeholder-related implications regarding the effect of military experience. The military experience of senior managers helps facilitate the attainment of broader corporate governance and economic objectives.
Originality/value
This article adds new insights to the literature on the role of managerial military experience in decision-making processes, financial reporting outcomes and firm performance by employing the upper echelons and imprinting theoretical perspectives.
This paper studied the link of board independence, audit effectiveness and the quality of reported earnings in Nigeria. Using convenient sampling, 7 consumer-goods firms quoted in the Nigerian stock exchange (NSE) from 2016 to 2020 (5 years) were used in conducting the research. The data source was primarily obtained from firm’s annual report and analyzed by using Random Effect GLS in STATA 14. The findings show that board independence and expertise are statistically significant in affecting the quality of reported earnings. The result found board independence and audit expertise to be negatively affecting earnings quality in the Nigerian consumer goods firms. Considering the fact that the results found the characteristics of firms board – independence and expertise - to be significant in affecting earnings quality, the study recommended that the financial users should not over rely and have absolute confidence in using financial report. The monitoring mechanisms for shielding financial report may not be effective, and the final report can mislead the stakeholders in their various decisions. Thus, the regulatory bodies should focus more in revising it guides that will improve quality of earnings to restore stakeholder’s confidence in using financial reports.
هدفت هذه الدراسة إلى فحص أثر هيكل الملكية على التحفظ المحاسبي وانعكاس ذلك على مخاطر انهيار أسعار الأسهم في البيئة المصرية. ولتحقيق هدف الدراسة فقد استخدم الباحث عينة مكونة من ١٠٧ شركة غير مالية من الشركات المدرجة في البورصة المصرية بإجمالي ٨٥٦ ملاحظة سنوية خلال الفترة من ٢٠١٣ إلى ٢٠٢٠م. اعتمدت الدراسة على أربعة أنواع لهيكل الملكية، وهي: نسبة تركز الملكية، نسبة الملكية الإدارية، نسبة الملكية المؤسسية، ونسبة الملكية الأجنبية، وتم قياس التحفظ المحاسبي باستخدام نموذج الاستجابة غير المتماثلة للأرباح تجاه الأخبار الجيدة والأخبار السيئة Asymmetric Timelines (AT) المقترح من جانب (Basu, 1997)، وتم قياس مخاطر انهيار أسعار الأسهم باستخدام مقياس معامل الالتواء السالب للعوائد غير العادية الأسبوعية The Negative Coefficient of Skewness.
أوضحت النتائج الآتي: أولًا: توجد علاقة إيجابية بين التحفظ المحاسبي المشروط ومخاطر انهيار أسعار الأسهم. ثانيًا: لا توجد علاقة بين تركز الملكية والتحفظ المحاسبي المشروط، ولكن توجد علاقة إيجابية بين تركز الملكية ومخاطر انهيار أسعار الأسهم، غيرَ أن التحفظ المحاسبي المشروط لا يلعب دورًا وسيطًا في هذه العلاقة. ثالثًا: توجد علاقة سلبية بين الملكية الإدارية والتحفظ المحاسبي المشروط، ولا توجد علاقة بين الملكية الإدارية ومخاطر انهيار أسعار الأسهم؛ ولكن توجد علاقة غير مباشرة بينهما من خلال التحفظ المحاسبي كمتغير وسيط. رابعًا: توجد علاقة إيجابية بين الملكية المؤسسية والتحفظ المحاسبي، كما توجد علاقة إيجابية -كذلك- بين الملكية المؤسسية ومخاطر انهيار أسعار الأسهم، بالإضافة إلى ذلك توجد علاقة إيجابية غير مباشرة بينهما من خلال التحفظ المحاسبي كمتغير وسيط. أخيرًا: لا توجد علاقة بين الملكية الأجنبية وكلٍّ من: التحفظ المحاسبي المشروط ومخاطر انهيار أسعار الأسهم.
This paper discusses trade-offs associated with three research designs commonly used in the earnings management literature: those based on aggregate accruals, those based on specific accruals and those based on the distribution of earnings after management. A key theme of the paper is that empirical procedures for aggregate accruals studies lag both our theories of incentives to manage accruals and our institutional knowledge of how accruals behave. Empirical findings suggest that aggregate accruals models that do not consider long-term earnings growth are potentially misspecified and can result in misleading inferences about earnings management behavior. It is suggested that future progress in the earnings management literature is more likely to come from application of specific accrual and distribution-based tests than from aggregate accruals tests.
This paper examines the relations between the disclosure practices of firms, the number of analysts following each firm and properties of the analysts' earnings forecasts. Using data from the Report of the Financial Analysts Federation Corporate Information Committee (FAF Report 1985-89), we provide evidence that firms with more informative disclosure policies have a larger analyst following, more accurate analyst earnings forecasts, less dispersion among individual analyst forecasts and less volatility in forecast revisions. The results enhance our understanding of the role of analysts in capital markets. Further, they suggest that potential benefits to disclosure include increased investor following, reduced estimation risk and reduced information asymmetry, each of which have been shown to reduce a firm's cost of capital in theoretical research.
Institutional investors have strong incentives to search for private predisclosure information about companies in their portfolios because of their fiduciary responsibilities and large resource bases. In addition, large institutional ownership may induce a high level of voluntary disclosure prior to earnings announcements. Greater private information acquisition and greater levels of voluntary disclosures prior to earnings releases suggest that the content of the earnings releases by firms with higher institutional ownership is partially preempted in predisclosure market prices. This paper tests the hypothesis that the market price response to the earnings announcements is smaller for securities with higher institutional holdings. The empirical tests provide evidence that the higher the institutional holdings, the lower the market reaction to earnings releases after controlling for security capitalization and the number of analysts following the firm.
Articles in the financial press suggest that institutional investors are overly focused on current profitability, which suggests that as institutional ownership increases, stock prices reflect less current period information that is predictive of future period earnings. On the other hand, institutional investors are often characterized in academic research as sophisticated investors and sophisticated investors should be better able to use current-period information to predict future earnings compared with other owners. According to this characterization, as institutional ownership increases, stock prices should reflect more current-period information that is predictive of future period earnings. Consistent with this latter view, we find that the extent to which stock prices lead earnings is positively related to the percentage of institutional ownership. This result holds after controlling for various factors that affect the relation between price and earnings. It also holds when we control for endogenous portfolio choices of institutions (e.g., institutional investors may be attracted to firms in richer information environments where stock prices tend to lead earnings). Further, a regression of stock returns on order backlog, conditional on the percentage of institutional ownership, indicates that institutional owners place more weight on order backlog compared with other owners. This result is consistent with institutional owners using non-earnings information to predict future earnings. It also explains, in part, why prices lead earnings to a greater extent when there is a higher concentration of institutional owners.
This paper examines whether institutional investors create or reduce incentives for corporate managers to reduce investment in research and development (R&D) to meet short-term earnings goals. Many critics argue that the frequent trading and short-term focus of institutional investors encourages managers to engage in such myopic investment behavior. Others argue that the large stockholdings and sophistication of institutions allow managers to focus on long-term value rather than on short-term earnings. I examine these competing views by testing whether institutional ownership affects R&D spending for firms that could reverse a decline in earnings with a reduction in R&D. The results indicate that managers are less likely to cut R&D to reverse an earnings decline when institutional ownership is high, implying that institutions are sophisticated investors who typically serve a monitoring role in reducing pressures for myopic behavior. However, I find that a large proportion of ownership by institutions that have high portfolio turnover and engage in momentum trading significantly increases the probability that managers reduce R&D to reverse an earnings decline. These results indicate that high turnover and momentum trading by institutional investors encourages myopic investment behavior when such institutional investors have extremely high levels of ownership in a firm; otherwise, institutional ownership serves to reduce pressures on managers for myopic investment behavior.
This paper provides empirical evidence on the association between audit committee formation and the quality of accounting earnings. The audit committee is responsible for overseeing the financial reporting and auditing process of the firm. This paper assesses the effectiveness of the audit committee in discharging these responsibilities by comparing the quality, or informativeness, of earnings reports before and after audit committee formation. For this paper, informativeness is measured by the extent to which the market reacts to the release of earnings reports. Economic theory predicts that the magnitude of the market's reaction to earnings is a nondecreasing function of earnings quality. The results show a significant increase in the market's reaction to earnings reports subsequent to the formation of the audit committee. Specifically, the reaction to earnings reports is more than 20 percent greater after the formation of the committee than before. These findings are robust to alternative variations in the research design. Overall, the evidence is consistent with the audit committee providing meaningful oversight of the financial reporting and auditing process.
Shareholder activism by institutions has become an important aspect of U.S. financial markets. In this article, we provide an overview of shareholder activism by institutional and individual investors. We discuss their objectives in terms of effects on corporate governance, the identity of the activists, and a brief history of their activities. We also present a survey of the theoretical and empirical research regarding the motivations and outcomes of shareholder activism. Draft: October 1998 Forthcoming Contemporary Finance Digest, (Autumn 1998) 2, 3 10-34. * The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author's colleagues upon the staff of the Commission.
This study tests whether the observed patterns in stock returns after quarterly earnings announcements are related to the proportion of firm shares held by institutional investors, a variable used by prior research to proxy for investor sophistication. Our findings show that the institutional holdings variable is negatively correlated with the observed post-announcement abnormal returns. Our findings also show that traditional proxies for transaction costs (i.e., trading volume, stock price) as well as firm size have little incremental power to explain post announcement abnormal returns when institutional holdings is an explanatory variable. If institutional ownership is a valid proxy for investor sophistication, these findings suggest that the trading activity of unsophisticated investors underlies the predictability of stock returns after earnings announcements. However, tests evaluating the validity of institutional holdings as a proxy for investor sophistication yield only mixed results. This calls for caution in interpreting our findings.
In this study, we document evidence on the relation between auditor tenure and earnings quality using the dispersion and sign of both absolute Jones-model abnormal accruals and absolute current accruals as proxies for earnings quality. Our study is motivated by calls for "mandatory auditor rotation" which are based on concerns that longer auditor tenure reduces earnings quality. Multivariate results, controlling for firm age, size, industry growth, cash flows, auditor type (Big 8 vs. non-Big 8), industry, and year, generally suggest higher earnings quality with longer auditor tenure. We interpret our results as suggesting that, in the current environment, longer auditor tenure on average results in auditors placing greater constraints on extreme management decisions in the reporting of financial performance.
This study examines the association between measures of earnings quality and auditor industry specialization. Prior work has examined the association between auditor brand name and earnings quality, using auditor brand name to proxy for audit quality. Recent work has hypothesized that auditor industry specialization also contributes to audit quality. Extending this literature, we compare the absolute level of discretionary accruals (DAC) and earnings response coefficients (ERC) of firms audited by industry specialists with those of firms not audited by industry specialists. We restrict our study to clients of Big 6 (and later Big 5) auditors to control for brand name. Because industry specialization is unobservable, we use multiple proxies for it. After controlling for variables established in prior work to be related to DAC and the ERC, we find clients of industry specialist auditors have lower DAC and higher ERC than clients of non-specialist auditors. This finding is consistent with clients of industry specialists having higher earnings quality than clients of non-specialists.
This paper examines the relation between economic incentives to manage earnings and discretionary accruals and the modifying effects of audit quality on this relation. We hypothesize that incentives to smooth earnings and incentives created by debt agreements motivate managers to strategically bias earnings. However, we expect that earnings manipulation is tempered by the quality of the firm's external auditor. The findings indicate that companies with non-Big Six auditors (a proxy for lower audit quality) report discretionary accruals that significantly increase income compared to companies with Big Six auditors. We also find that managers respond to debt contracting and income-smoothing incentives by strategically reporting discretionary accruals. In addition, companies with incentives to smooth earnings upwards (downwards) report significantly greater income-increasing (decreasing) discretionary accruals when they have non-Big Six auditors. However, we do not find that audit quality affects earnings management that occurs in response to high leverage.
This paper examines the association between block ownership and market liquidity. Blockholders are believed to have access to private, value-relevant information via their roles as monitors of firms' operations. consistent with this, we find that firms with greater blockholder ownership, either by managers or external entities, have larger quoted spreads, effective spreads, adverse selection spread components, and smaller quoted depths.
This article hypothesizes that the level of managerial ownership affects both the informativeness of earnings and the magnitude of discretionary accounting accrual adjustments. The hypothesis draws on the theory of the firm, and exploits: (1) separation of ownership from control of economic decisions, (2) the extent and consequences of accounting-based contractual constraints, and (3) managers' incentives in selecting and applying accounting techniques. Results show managerial ownership is positively associated with earnings' explanatory power for returns and inversely related to the magnitude of accounting accrual adjustments. Moreover, ownership is less important for regulated corporations, suggesting regulation monitors managers' accounting choices.
We study shareholder proposals across a period of substantial activity and find systematic differences both across sponsor identity and across time. To measure the success of shareholder activism, we examine voting outcomes and short-term market reactions conditioned on proposal type and sponsor identity. The voting analysis documents that sponsor identity, issue type, prior performance and time period are important influences on the voting outcome. Proposals sponsored by institutions or coordinated groups appear to act as substitutes gaining substantially more support than proposals sponsored by individuals. The nature of the stock market reaction, while typically small, varies according to the issue and the sponsor identity.
This paper investigates circumstances under which accruals are predicted to improve earnings' ability to measure firm performance, as reflected in stock returns. The importance of accruals is hypothesized to increase (i) the shorter the performance measurement interval, (ii) the greater the volatility of the firm's working capital requirements and investment and financing activities, and (iii) the longer the firm's operating cycle. Under each of these circumstances, cash flows are predicted to suffer more severely from timing and matching problems that reduce their ability to reflect firm performance. The results of empirical tests are consistent with these predictions.
This paper examines the impact of ownership structure and board composition on voluntary disclosure. Ownership structure is characterized by managerial ownership, blockholder ownership and government ownership, and board composition is measured by the percentage of independent directors. Voluntary disclosure is proxied by an aggregated disclosure score of non-mandatory strategic, non-financial and financial information.Our results show that ownership structure and board composition affect disclosure. We find that lower managerial ownership and significant government ownership are associated with increased disclosure. However, blockholder ownership is not related to disclosure. An increase in outside directors reduces corporate disclosure. We also find that larger firms and firms with lower debt had greater disclosure.
This study hypothesizes that because shareholders have a liquidation option, losses are not expected to perpetuate. They are thus less informative than profits about the firm's future prospects. The results are consistent with the hypothesis. They also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses. The liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive. Alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests.
Typescript. Thesis (Ph. D.)--University of Florida, 1990. Vita. Includes bibliographical references (leaves 143-146).
This article provides evidence linking corporate governance mechanisms to higher bond ratings and lower bond yields. Governance mechanisms can reduce default risk by mitigating agency costs and monitoring managerial performance and by reducing information asymmetry between the firm and the lenders. We find firms that have greater institutional ownership and stronger outside control of the board enjoy lower bond yields and higher ratings on their new bond issues. However, concentrated institutional ownership has an adverse effect on yields and ratings. These results are robust to a specification that controls for institutional ownership being influenced by bond yields.
This paper investigates whether the level of institutional ownership has any effect on the market reaction to announcements of a firm-level "event", namely the issuance of equity. Previous studies that have examined the association between some proxy for firm value (either Tobin's q or a measure of accounting profitability) and ownership structure have a problem with the direction of causality. For instance, a positive association between firm value and institutional ownership can either be interpreted as evidence of monitoring by institutions or that institutions tend to invest systematically in high-value firms. If we find any relation between the announcement effects of equity issues, and therefore firm value, and institutional ownership, the direction of causality has to run from institutional ownership to firm values not the other way around.
This study investigates the effects of' institutional ownership on the debt policy and managerial ownership of the firm. Earlier literature on the agency model of the firm widely recognizes that the use of managerial stock ownership and external debt play an important role in limiting agency conflicts and enhancing firm value. The literature also recognizes that external monitors, such as institutional investors, can serve a useful role in limiting agency problems in the firm. However, investigations into the usefulness of' these agency-conflict-reducing mechanisms have tended to treat each in isolation with little attempt to study the inter-relationships among them. This study examines the impact of institutional holdings on managerial ownership and debt policy in an integrated framework utilizing a simultaneous system of equations estimation procedure. The study hypothesizes that the use of debt and managerial stock ownership are inversely related to institutional ownership in the firm. The empirical evidence provided in this study is consistent with this hypothesis.
Conservatism is interpreted to mean that accountants more frequently report current "bad news" about future cash flows in contemporaneous earnings than current "good news." Thus, earnings reported under GAAP should be more timely in reporting "bad news" about future cash flows than "good news." This paper, using the firm's stock return as a measure of news, shows that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns. It is also shown that the greater timeliness of earnings relative to cash flow measures is largely due to a greater sensitivity to concurrent negative returns. This result is consistent with accountants recording accruals conservatively. Another implication of conservatism is that negative earnings surprises are likely to be less persistent than positive earnings surprises, because earnings reports more bad news concurrently than good news, with the latter being spread over several periods. This is shown to be true empirically. It is predicted and found that earnings response coefficients are higher for positive earnings changes than for negative earnings changes, which is consistent with the market correcting for the difference in persistence in conservatively determined earnings. It is also found that the sensitivity of earnings to negative returns has more than quadrupled since 1980, while the sensitivity of earnings to negative returns has declined by two-thirds, suggesting that earnings measurement has become more conservative. Increases in accounting conservatism are found to be correlated with increases in auditor liability, but no causal inferences are drawn.
This paper develops a new model of market abuse detection in real time. Market abuse is detected, as Minenna (2003) proposed, on the basis of prediction intervals. The model structure is based on the discrete-time, extended market model introduced by Monteiro, Zaman, Leitterstorf (2007) to analyze the market cleanliness. Parameters of the expected return equation are assumed, however, to be time-varying and estimated under the state-space framework using the extended Kalman filter postulated by Chou, Engle, Kane (1992) to capture the GARCH effect in returns. QML estimation is performed on intraday data; its utilization is proposed as an alternative to the continuous time modeling by Minenna (2003). This framework is generalized to the bivariate case which enables the analysis of daily open/close data. The paper also extends procedures of the statistical verification of the estimated state-space model to include the uncertainty arising from time-invariant parameters.
Investment institutions with substantial shareholdings in a firm have the resources and incentives to monitor and influence management decisions. Whether the institutions actually monitor and exert pressure on managers is an empirical question. Previous studies have reported mixed results on this question. We examine whether large institutional shareholdings in a firm deter earnings management by its managers when those executives otherwise have incentives to increase or decrease reported profits. Using discretionary accounting accruals as the measure of earnings management, we find that the presence of large institutional shareholdings inhibit managers from increasing or decreasing reported profits towards the managers' desired level or range of profits. The evidence is consistent with institutional investors monitoring and constraining the self-serving behavior of corporate managers.
This paper examines the issue of voluntary disclosure of information by firms with heterogeneous shareholders. It shows that, in a rational expectations setting, better-informed shareholders prefer less disclosure than less well-informed shareholders. This is due to differences in the adverse risk-sharing effect and the beneficial cost-saving effect of disclosure among shareholders with different risk tolerances and information acquisition cost functions. The presence of individual liquidity shocks is shown to reduce shareholder disagreements regarding a firm's disclosure policy. Copyright 1993 by American Finance Association.
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