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The impact of institutional investor type on corporate earnings management


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Koh, PS 2001 , 'The impact of institutional investor type on corporate earnings management', PhD thesis, University of Tasmania.

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This thesis examines the relation between institutional investor type (specifically,
transient and long-term oriented institutional investors) and the discretionary
earnings management strategies of their portfolio firms. By focusing on accruals
management, it extends current understanding of the relation between institutional
investor type and earnings management beyond (a) earnings management through
real investment decisions and (b) only firms with research and development
activities (Bushee, 1998). The association between transient (long-term oriented)
institutional investors and portfolio firms' accruals management is first examined
without reference to portfolio firms' specific earnings targets. Then, the association
is investigated conditional upon portfolio firms' non-discretionary earnings relative
to earnings targets.
Transient institutional investors' investments in portfolio firms are transitory and
fluctuate over a short period of time (Bushee, 1998; Porter, 1992). These investors
create incentives for portfolio firm managers to adopt aggressive earnings
management strategies to avoid earnings disappointment, or to take a bath when
earnings disappointment is unavoidable. In contrast, long-term oriented institutional
investors invest for the long-term prospects of their portfolio firms rather than focus
on the current earnings performance of portfolio firms (Bushee, 1998; Shleifer and
Vishny, 1997). They actively participate in monitoring their portfolio firms and their
presence is argued to constrain and limit portfolio firm managers' earnings
management discretion (Rajgopal and Venkatachalam, 1998; Shleifer and Vishny,
1997). Using a sample of US institutional investors and US portfolio firms, the results
support the arguments that transient institutional ownership is associated with both
larger income increasing and larger income decreasing discretionary accruals. This
is consistent with transient institutional ownership encouragement of managerial
myopia (Bushee, 1998). However, evidence supporting the managerial myopic
effects of transient institutional investors is stronger when total institutional
ownership is predominantly transient. There is insufficient evidence to suggest that
transient institutional investors encourage "big bath" strategies, and only very
limited evidence of an association between transient institutional ownership and
portfolio firms' income smoothing strategies.
Consistent with long-term oriented institutional investors constraining portfolio firm
managers' accruals discretion, long-term oriented institutional ownership is found to
be associated with smaller income increasing and smaller income decreasing
discretionary accruals. The constraining effects of long-term oriented institutional
investors remain evident among portfolio firms that have exercised their accrual
discretion to meet their earnings targets. For firms that fail to meet their earnings
targets, long-term oriented institutional ownership is negatively associated with
discretionary accruals. That is, inconsistent with their long-term orientation, longterm
oriented institutional investors appear to encourage "reverse" myopic accrual
management behaviour among portfolio firms. There is no evidence supporting
arguments that long-term oriented institutional investors create incentives for
portfolio firms to adopt income smoothing strategies.
These results highlight the importance of examining different types of institutional
ownership separately when investigating the effects of institutional ownership on firms' earnings management. The study also provides evidence indicating
alternative effects of institutional ownership types on firms' discretionary accruals,
conditional upon the position of firms' non-discretionary earnings relative to their
earnings targets. The overall results provide evidence indicating the complexities of
institutional ownership type effects on portfolio firms' accrual management
strategies. The insights provided in this thesis are valuable to academic researchers,
analysts, investors and regulators who seek an understanding of the influences and
implications of institutional investor type on corporate financial reporting.

Item Type: Thesis - PhD
Authors/Creators:Koh, PS
Keywords: Portfolio management, Corporations, Institutional investments
Copyright Holders: The Author
Copyright Information:

Copyright 2001 the Author - The University is continuing to endeavour to trace the copyright
owner(s) and in the meantime this item has been reproduced here in good faith. We
would be pleased to hear from the copyright owner(s).

Additional Information:

Thesis (Ph.D.)--University of Tasmania, 2001. Includes bibliographical references

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